



fmmmBwmmfU ■ 





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Book. 






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AMERICAN 
POLITICAL f^Cpj^l^jiY; 



INCLUDING STRiaxUBi^ ON 



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THE MANAGEMENT OP f^gC^RRENCY 



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AND THE FINANCES SINCl 



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WITH A CHART BHOWINa THE FLUCTUATIONS IN THE PRICE OF GOLD. 



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FRANCIS BO WEN, 

ALFORD PROFESSOR OF NATURAL RELIGIOS, MORAL PHILOSOPHY, AWD 
CIVIL POUTt !>• HARVARD CQLLEOS. 



NEW YORK: 
SCRIBNER, ARMSTRONG, AND CO., 
1877. 



l?77 



Xotered according to Act of Congress, In the year 1870, bj 

CHAKLES SCRIBKEE & CO., 

in the Clerk's Office of the District Court tor the Southern District of New York 



Transfer 
Engineers School Liby. 
June29,l»31 



BIVKRSIDE, OAMBBIDGB: 
PItlirrBD BY B. O. HOUGHTOW AHD COMPAKT. 



PREFACE. 



DUEING the last eight years, the United States have been 
trying experiments in the management of the Currency, in 
Banking, Finance, and Taxation, on a larger scale than the 
world had ever witnessed. The trial has cost the country 
much ; we have not yet recovered from its consequences, and 
probably it will yet be long before we shall cease to feel them. 
But the experience thus gained has been valuable for the in- 
terests both of science and of practical legislation. It has 
thrown much light on the theories of Cun-ency and Finance, 
which are the most interesting, because the most practically 
important, portions of the science of Political Economy. It 
has demonstrated by the logic of facts some of the main doc- 
trines in these theories, disclosed some important qualifications 
of maxims formerly received, and raised questions of broad 
scope for further inquiry. I have here endeavored to bring 
together the results of these experiments, and to read the 
lessons which they teach. The book is to be regarded more 
as a new work, than as a new edition of the volume wliich I 
published, fourteen years ago, under the title of " Principles 
of Political Economy." Several chapters liave been added, 
others suppressed or rewritten, and tlie remainder much con- 
densed and modified. 

The title under which the book now appears may seem to 
require defence or explanation. I hold, w^ith Mr. Samuel 
Laing, that "every country has a Political Economy of its 
own, suitable to its own physical circumstances of position on 
the globe," and to the character, habits, and institutions of 
its people. Unquestionably there is a universal science of 



iv PREFACE. 

PoKtical Economy, applicable not only to America, but to 
France, England, and Germany, — to all nations under the 
sun. There must be such a science, for the habits and dispo- 
sitions of men, as manifested in the pursuit of wealth, may 
be reduced to general principles, and thus become subjects of 
legitimate scientific classification and inquiry, just as much 
as those other habits and dispositions which appear in the 
constitution and history of organized society, and which, when 
generalized and classified, become the science of Politics. 
There is a general science of Human Nature, of which the spe- 
cial sciences of Ethics, Psychology, Politics, and Political Econ- 
omy are so many distinct and co-ordinate departments. It 
is the science as taken in this broad sense which such writers 
as Eicardo, Maltbus, McCulloch, and J. S. Mill have endeav- 
ored to develop and to teach ; though, as it seems to me, with 
very limited success. They have even assumed to treat it 
deductively, deriving its principles from their knowledge of 
human nature, and traciag these down to the outward con- 
duct of men and to the eocial phenomena which these general 
motives produce or influe7'ioe. 

But it must be admii^ied, I think, that these universal 
principles are comparatively few and unimportant, and if the 
science were limited to them, it would be of narrow compass 
and limited utility. It can be fully and profitably set forth 
only in the inductive method, by observing and analyzing the 
phenomena in a particular case, and tracing these up to their 
sources, the circumstances of the people and the principles of 
human nature in which they originated. Because Adam 
Smith, in the main, adopted this method, his great work is a 
mine of information respecting the economical condition of 
Great Britain in the middle of the last century, and the 
institutions and laws by which this condition was affected, 
Even the writings of Eicardo, J. S. Mill, and their followers, 
though professing to treat the subject deductively and in 
the abstract, so that their conclusions shall be universally 
applicable, are pervaded with a tacit reference to \,he p'rcum- 
stances and institutions of the particular people f^r whom 



PKEFACE. V 

they wrote. The system which they have expounded is 
really the Political Economy of England alone, and is even 
more characteristic and peculiar than her social organization 
and civil polity. Here in America, as it seems to me, we 
need an American Political Economy, the principles of the 
science being adapted to what is special in our physical con- 
dition, social institutions, and industrial pursuits. The facts 
need to be fully presented, before they can be analyzed and 
referred to their scientific principles. 

Political Economy is eminently a practical science, and a 
treatise on it may profitably include much valuable informa- 
tion respecting the habits of business, the course of domestic 
and foreign trade, and the methods which have been sug- 
gested by experience for applying Labor and Capital to the 
best advantage. I have endeavored to incorporate into this 
work such particulars respecting the operations of banking, 
the disposal of the public lands, the office of bills of exchange, 
the functions of the currency, the supply of the precious 
metals, the various modes of taxation, and the financial his- 
tory of this country for the last ten years, as might be useful, 
not only to young men in College, but to those who are 
about to enter the mercantile profession. 

Cambeidge, February 24, 1870. 



CONTENTS. 



CHAPTER I. 

/?AOS 

Wealth and its Transmutations: the Aims, the LmrrATiONS, 
AND THE Advantages of the Study of Political Economy: 
THE Laissez-faire or Let-alone Principle .... 1 



CHAPTER II. 

How Wealth is created, and what constitutes Exchangeable 
Value: the Measure of Value: how Wealth is distributed 
among its Producers 22 



CHAPTER III. 

The Division of Labor: its beneficial and injurious Conse- 
quences: Effects of the Introduction of Machinery . . 45 

CHAPTER IV. 

The Nature of Capital and the Means of its Increase: Cir- 
cumstances which favor the GrROWTH OF CAPITAL : THE SeCU- - 

BUY OP Property 65 

CHAPTER V. 

The Increase op Capital as affected by the Encouragement 
OF Manufactures, and by the Concentration of the People in 
Cities and Towns 71 



VIU CONTENTS. 

CHAPTER VI. 

The Increase of Capital as affected by the Advantages held 
OUT TO THE Possessors of Wealth : Injusious Effects of Caste, 
OR the Fixity of Eanks and Classes 90 

CHAPTER VII. 

Strife between Laborers and Capitalists : Strikes and Trade- 
Unions: Means of improving the Condition of the Laboring 
Classes 110 

CHAPTER VIII. 

The MALTHtJSLA.N Theory of Population considered and refuted : 
the true Law of the Increase of Population . . . 125 

CHAPTER IX. 
The Theory of Rent 150 

CHAPTER X. 

Causes which affect the Rate of Wages: why Wages are not 
equal in different Employments 173 

CHAPTER XI; 

Causes which affect the Rate of Profits: Limited Extent op 
THE Field for the Use of Capital : Theory of Gluts . . 204 

CHAPTER XII. 

The Theory and Uses of Money, as illustrated by Incidents 
IN the War of the G-reat Rebellion 237 

CHAPTER XIII. 

The Distribution of the Precious Metals throughout the 
World : Substitutes for Money and Means of economizing 
ITS Use : Bills of Exchange : Decline in the Value of 
Money 273 



CONTENTS. IX 

CHAPTER XIV. 

The Functions of Banks and the Nature of Bank-Notes: the 
Operations of Credit 311 

CHAPTER XV. 

Paper Money and its Use as Currency during a Revolution or 
Civil War: History of the Emission of such Money in the 
War of the Rebellion 335 

CHAPTER XVI. 
The National Banking System 367 

CHAPTER XVII. 
National Debt: Various Methods of Punding .... 393 

CHAPTER XVIII. 
Taxation 426 

CHAPTER XIX. 

Effects of Speculation upon Prices : the Phenomena of a Com- 
mercial Crisis 460 

CHAPTER XX. 

The Doctrine of International Exchanges: the Limits of Free 
Trade and the Protective System 480 



POLITICAL ECONOMY. 



CHAPTER I. 

TTEALTH AND ITS TRANSMUTATIONS : THE AIMS, THE LIMITATIONS, 
AND THE ADVANTAGES OF POLITICAL ECONOMY : THE LAISSEZ- 
FAIRE, OR LET-ALONE PRINCIPLE. 

The most obvious, though certainly not the most important, 
difference between a civilized commxmity and a nation of savages 
consists in the vastly greater abundance, possessed by the former, 
of all the means of comfort and enjoyment. These means, includ- 
ing the necessaries, conveniences, and luxiu'ies of life, are chiefly 
material objects, — such as manufactui'ed goods, articles of food 
and clothing, ships and buildings, the useful and the precious 
metals, tools and machines, and ornaments, or things designed to 
gratify the taste and the senses. Some, however, are immaterial, 
and yet are just as much objects of desire, just as much objects 
of barter and sale, as cloth and bread. The legal knowledge and 
acumen of a lawyer, for instance, the vocal powers of a remai-kable 
singer, the mimetic talent of an actor, all command a price in the 
market quite as readily as any goods in a shop. When an occasion 
arises, we buy the services of a lawyer or a physician, just as we 
buy a ticket to a concert, or an instrument of music for a drawing- 
room.* 

* Many Political Economists exclude immaterial products from their definition of 
•wealth, because the labor which is devoted ,to such products "ends in immediate 
enjoyment, without any increase of the accumulated stock of permanent means of 
enjoyment." " When a tailor makes a coat and sells it," argues Mr. .1. S. Mill, 
" there is a transfer of the price from the customer to the tailor, and a coat besides, 
which did not previously exist ; but what is gained by an actor is a mere transfer 
from the spectator's funds to his, leaving no article of wealth for the spectator's in- 



2 WEALTH AND ITS TEANSMUTATIONS. 

Now, the aggregate of all these things, whether material or imma- 
terial, ivhich contribute to comfort and enjoyment, which cannot he ob- 
tained or produced without more or less labor, and which are objects 
of frequent barter and sale, is what we usually call Wealth ; and 
individuals or nations are denominated rich or poor, according to 
the abundance or scarcity of these articles which thev possess, or 
have at their immediate disposal. 

Two questions may be asked respecting the production of these 
articles: — 1. By what mechanical processes are they manufac- 
tured or obtained ? To answer this query is the business of a 
man of practical science or an artisan, — of a chemist, a mechanic, 
or a farmer ; as Political Economists, we have nothing to do with 
it. But (2.) we may ask, On what principles do men readily ex- 
change these articles for each other ; and what motives, what general 
laws, regulate their production, distribution, and consumption ? Po- 
litical Economy undertakes to answer this question, and is there- 
fore properly considered as one of the Moral Sciences. It depends, 
quite as much as Politics and Ethics, upon the principles of the 
human mind. It is quite as possible to reduce to general laws the 
habits and dispositions of men, so far as they are manifested in 
their efforts for the acquisition of wealth, as it is to develop, from 
observation and consciousness, the laws of our moral constitution. 
Political Economy begins with the supposition that man is dis- 
posed to accumulate wealth beyond what is necessary for the im- 
mediate gratification of his wants, and that this disposition, in the 
great majority of cases, is, in fact, unbounded ; that man's incli- 
nation to labor is mainly controlled by this desire ; that he is con- 
stantly competing with his fellows in this attempt to gain wealth ; 
and that he is sagacious enough to see what branches of industry 
are most profitable, and eager enough to engage in them, so that 

demnification." "We reply, that the purchaser obtains only a gratification of desire 
in either case. From the coat, he has moderate enjoyment prolonged for some months ; 
but he might do without it, and work in his shirt-sleeves. From the theatre, he has 
keen enjoyment, that lasts only a few hours ; and he may prefer such pleasure to the 
luxury of additional clothing. It is inconsistent to give the name of wealth to what 
pleases our palates for a moment, and^deny it to what gives keener pleasure to our 
ears. The characteristic of all wealth is, directly or indirectly, to satisfy some 
want, or gratify some desire. Food which is ready to be eaten is wealth, just as 
much as the knives and forks with which we eat it ; though the former is devoured 
at once, and there is an end of it, while the latter may remain in daily use for 
years. 



WEALTH AND ITS TRANSMUTATIONS. 3 

competition regularly tends to bring wages, profits, and prices to a 
level. The science, then, is more closely allied with the Philoso- 
phy of Mind than with Natural History, or the Physical Sciences. 
It has been called Catallactics, or "the Science of Exchanges"; 
and, agreeably to this notion, man himself has been defined to be 
an animal that makes exchanges ; "as no other, even of those 
animals which, in other points, make the nearest approach to ra- 
tionality, has, to all appearance, the least notion of bartering, or 
in any way exchanging one object for another." 

With regard to the articles that constitute wealth, we observe 
that far the larger portion of them are perishable, or quickly con- 
sumable. Some of them, like the immaterial products, are con- 
sumed at the instant that they are produced ; others, like articles 
of food, last a little longer, but perish if not quickly used. The 
fashion and the fabric of manufactured goods soon decay and pass 
away, the former being often more short-lived than the latter. 
Tools and machinery wear out ; houses and other buildings need 
constant repair, and, at stated intervals, must be wholly renewed. 
Hardly anything but the solid land itself — the great *God-given, 
food-producing machine — is permanent ; and the exchangeable 
value even of the land (the only quality of it which we have to 
consider in this science) quickly diminishes, and almost wholly 
disappears, if it be not kept up by the constant application of 
labor and capital, or by the continued prosperity of the community 
who live upon it. The best-situated land in a populous city may 
be worth $ 60 or $ 70 a square foot ; but if the other articles 
which constitute the wealth of that city — the ships in her harbor 
and the goods in her shops — were not perpetually renewed, the 
land would deteriorate in value with gi-eat rapidity ; and if the 
city should become, in respect to population and business, a small 
and decaying village, the land might not be worth $ 40 an acre. 

Wealth, then, must be perpetually renewed, or it quickly disap- 
pears. The stock of national wealth is like the flesh, blood, and 
bones of a man's body, which are in a state of constant flux and 
renovation. Physiologists tell us that our bodies are entirely re- 
newed about once in seven years ; but the riches of an opulent 
community are not so long-lived even as this. Let labor universal- 
ly cease, let every man, woman, and child rest with folded arms, or 
do nothing but eat, drink, and be meny, — and those riches would 



4 WEALTH AND ITS TKANSMUTATIONS. 

melt and waste like snow under a July sun. National wealth, 
then, may be more fitly compared to a given portion or section 
of the waters of a running stream. The water is always chang- 
ing, yet, in one sense, is always the same, so long as the supply 
from above is maintained ; but if the springs in the upper country 
should be dried up, the efiiux below would soon drain the channel. 

And here is one proof, among a thousand others, of the folly and 
ignorance of those who cry out against the institution of property, 
and call for an equal distribution of all the wealth of a community 
among all its members. " Riches haVe wings " in a far more im- 
mediate and practical sense than these people are aware of They 
always talk as if the national wealth was a fixed and imperishable 
quantity, like the land, the sunlight, and the air ; and as if, unlike 
these, it was monopolized by a few, though really sufiicient for the 
wants of all. Their blunder is as great as would be that of an 
ignorant rustic, who, after visiting the market of a populous city 
on the Mondays of two successive weeks, and observing that the 
stalls presented almost precisely the same array of meats and 
vegetables, in the same order, should conclude that there had been 
no change, and that, as here was a permanent stock of food enough 
for all, while some families in the city were suffering from hunger, 
a general and equal distribution of this stock, without compensa- 
tion to the owners, should be ordered, under the idea that it would 
make any future want of provision impossible. The possibility 
that this great store might all be consumed in one day ; that the 
dealers, deten-ed by this spoliation, might not supply the market 
at all on the next day ; and that many indigent families, suddenly 
finding all their wants supplied without any effort on their part, 
would give up labor altogether, — would never occur to him. 

" This perpetual consumption and reproduction of capital," says 
Mr. J. S. Mill, "affords the explanation of what has so often 
excited wonder, — the great rapidity with which countries re- 
cover from a state of devastation ; the disappearance, in a short 
time, of all traces of the mischiefs done by earthquakes, floods, 
hurricanes, and the ravages of war. An enemy lays waste a 
country by fire and sword, and destroys or carries away nearly all 
the movable wealth existing in it ; all the inhabitants are ruined, 
and yet, in a few years after, everything is much as it was before. 
This vis medicatrix naturae has been a subject of sterile astonish- 



WEALTH AND ITS TEANSMUTATIONS. 5 

ment, or has been cited to exemplify the wonderful strength of the 
principle of saving, which can repair such enormous losses in so 
brief an interval. There is nothing at all wonderful in the mat- 
ter. What the enemy have destroyed would have been destroyed, 
in a little time, by the inhabitants themselves ; the wealth which 
they so rapidly reprodiice would have needed to be reproduced, 
and would have been reproduced, in any case, and probably in as 
short an interval. Nothing is changed, except that, during the 
reproduction, they have not now the advantage of consuming what 
had been produced previously. The possibility of a rapid repair 
of their disasters mainly depends on whether the country has been 
depopulated. If its effective population have not been extirpated 
at the time, and are not starved afterwards, [and if their exertions 
are not paralyzed by the dread of a similar quickly recurring 
calamity,] then, with the same skill and knowledge which they had 
before, with their land and its permanent impi'ovements unde- 
stroyed, and the more durable buildings probably unimpaired, or 
only partially injured, they have nearly all the requisites for their 
former amount of production. If there is as much of food left to 
them, or of valuables to buy food, as enables them, by any amount 
of privation, to remain alive and in working condition, they will, in 
a short time, have raised as great a produce, and acquired collec- 
tively as great wealth and as great a capital, as before, by the 
mere continuance of that ordinary amount of exertion which they 
are acciistomed to employ in their occupations. Nor does this 
evince any strength in the principle of saving, in the popiilar sense 
of the term ; since what takes place is not intentional abstinence, 
but involuntary privation." 

This pregnant truth, that the whole stock of national wealth is 
in a constant and rapid process of consumption and reproduction, 
is generally lost sight of, because we see that the fortunes of in- 
dividuals, the aggregate of which constitutes the national stock, 
are comparatively permanent, and, as it seems, do not need to be 
perpetually renewed. If once raised considerably above a mere 
competence, and then "invested," as the phrase goes, with ordinary 
care and judgment, a man's property will continue apparently 
without change, all the while yielding its regular income or in- 
crease. How can this fact be reconciled with the principles that 
have just been stated respecting the nature of all wealth 1 The 



6 WEALTH AND ITS TEANSMUTATIONS. 

answer to this question brings us at once to the heart of the sub- 
ject. 

It is the property, the ownership, that is unchanged, and thus 
the fortunes of individuals remain intact ; the articles which are 
the subjects of that property, — which are owned, — and which, at 
any one time, constitute the wealth, are constantly changing ; they 
are used up, and then renewed, without the owner's co-operation, 
and often even without his knowledge. Barring casualties, un- 
lucky investments, and the like, (which, being comparatively few 
and infrequent, may be left out of the account,) no man's property 
is consumed without being replaced by the very act of consump- 
tion, unless he himself, consciously and wilfully, consumes or ex- 
pends it unproductively ; — that is, upon the gratification of his 
own tastes and appetites, without looking for a return or replace- 
ment. To "invest" one's savings is to lend them. Not having 
time, inclination, or perhaps ability, to use them reproductively to 
advantage, — that is, to superintend the constant changes of form 
which they must undergo, or quickly perish, — we lend them to 
others, who can and will direct their transformations, on condition 
of receiving a small portion of the profits of these changes. For 
it is also the nature of wealth, when well managed, to grow, or in- 
crease, by each change of form. 

To make this clearer, we will analyze a single instance, — the 
simplest one that can be found. If the earnings of an artisan for 
a year have amounted to % 300, he viay expend them all upon 
food, clothing, and amusement. In this case, he spends them all 
unproductively, — that is, without expecting a return or replace- 
ment of them. At the year's end, all the advantage which re- 
mmns to him from his year's labor is, that his strength, health, 
and spirits are renewed or replaced, so that he can now go to work 
and eai'n another year's wages. 

But suppose that he is frugal, and ambitious to grow rich. He 
will then contract his daily expenses, drink nothing but water, 
give up all amusements, and thus, at the end of the year, he wiU 
find that his health and spirits are even greater than before, and 
that he has saved perhaps $ 100, or one third of his earnings. 
What will he do with this $ 100 1 In a rude state of society, 
among a half-civilized people, or under the government of a Turk- 
ish pacha, property being insecure, he would probably obtain it in 



WEALTH AND ITS TRANSMUTATIONS. 7 

the form of gold or silver coin, and bury it in the comer of his 
cellar or garden. There, sure enough, it would remain without 
change, and therefore without income or increase. But in this 
country, in England, or France, he would probably put it in the 
Savings' Bank ; that is, he would lend it to the bank, which, for 
shortness, we will suppose to be a bank both of savings and dis- 
count. In consequence of this loan, the bank will be able to lend 
or discount $ 100 more to one of its customers. Suppose a baker 
wishes to extend his business, but has not capital enough of his 
own to buy more flour with. He borrows this $ 100 of the bank 
for four months, and with it he immediately purchases twenty bar- 
rels of flour more than he could otherwise have purchased. What 
he bon-ows of the bank is not, in fact, the $100 biU which is 
handed to him across the counter, but the twenty baiTels of flour 
which he buys with it ; the bank-bill being only a ticket or certifi- 
cate, in which the bank directors say to the flour-dealer, " Deliver 
this man twenty barrels of flour, and we will pay you for it." The 
flour-dealer complies, and immediately carries back the bill to the 
bank, and is paid for it either in hard specie, or in that amount 
carried to his credit, or in any other form that he may prefer. We 
may put aside, then, in future, any consideration of the bank-bills ; 
for they are nothing but tickets of transfer^ or orders from the bank 
to any merchant, asking him to deliver the bearer a certain amount 
of goods, and the bank will pay him for them. 

But let us follow the laborer's $ 100 of savings. In what form 
do they now exist % Evidently they have become twenty barrels 
of flour, which the baker gradually transforms into many loaves 
of bread, and sells them to his customers. Before the four months 
expire, the bread is all sold and eaten ; so that the $ 100 are now 
fairly consumed. But has their value disappeared 1 By no means. 
The baker's customers have paid him for this bread at least $ 1 20, 
80 that he can now repay the bank the $ 100 that he borrowed, — 
with the addition of two dollars for four months' interest, — and 
put eighteen dollars into his own pocket as the reward of his labor. 
The bank, being again in funds, can now lend, we will suppose, 
$ 102 worth of leather, for four months, to an enterprising cord- 
wainer, who begins immediately to manufacture it into boots and 
shoes. Before his four months have expired, these are all sold, 
(half of them, perhaps, are half worn out,) and he has received, 



8 WEALTH AND ITS TRANSMUTATIONS. 

it may be, $ 225 for them ; so that he can now repay the bank its 
loan of $ 102, besides two dollars and a fraction for interest, pay 
his workmen probably $ 100, for a good deal of labor was needed 
for the consumption of that amount of leather, and put a little 
more than twenty doUars into his own pocket. At the end of eight 
months, then, the bank has a little over $ 104 to let out for another 
period of four months. A paper-maker borrows this, buys rags 
with it, makes paper out of them, sells it, and with the proceeds 
he pays the bank $ 106 and a fraction. 

The year has now expired, and our frugal laborer, having occa- 
sion to make a different use of his savings, goes to the bank for 
them, and receives $ 104.50, the bank retaining nearly two dollars 
as compensation for its agency in the affair. Thus the laborer 
finds that, by some process incomprehensible to him, the $ 100 
which he deposited in the bank for a year has hatched $4.50, 
which it certainly woiild not have done if it had been simply 
locked up in the vault for safe-keeping. Could he have followed 
that process, he would have seen his $ 1 00 successively becoming, 
or assuming the shape of, flour, bread, leather, shoes, rags, and 
paper ; and in each of these forms, in turn, he would have seen it 
entirely consumed or used up. The flour, leather, and rags have 
been manufactured into corresponding articles, the bread has been 
eaten, the shoes are half worn out, and the paper is covered with 
writing and printing, so that a new supply of each is called for. 
There has been a net gain at each stage of the transaction, and the 
total gain has been fairly distributed among all the parties to it, 
compensating each for his labor or frugality. 

If any one thinks the instance here analyzed is a trivial or ex- 
ceptional one, so that it throws little light on the general theory 
of wealth, let him look at the returns made to the Legislature by 
all the Savings' Banks in Massachusetts in 1862, which show that 
the amount deposited in those institutions exceeded $ 50,400,000 ; 
that it yielded an annual average dividend of over six per cent ; and 
that the number of depositors was 248,900, so that the average 
amount to the credit of each depositor was a fraction over $ 202. 
This aggregate of savings — made up, be it remembered, by the 
labor and frugality of Irish domestics, small mechanics, day-labor- 
ers in the country, and the like — is more than enough to build 
and keep in motion all the cotton and woollen factories in Massa- 



WEALTH AND ITS TKANSMUTATIONS. 9 

chusetts ; as the aggregate capital of all these establishments in that 
State, in 1865, fell short of forty-nine millions. Observe, also, that 
large sums are annually withdrawn from these institutions, for pro- 
ductive investment in other ways, and the deficit thus made is 
immediately supplied by fresh deposits ; so that these Savings' 
Banks resemble great lakes, in which the water ever remains at the 
same level, though they are constantly supplying rvmning streams, 
•which bear a fertilizing influence with them all their way towards 
the ocean. 

We now go back to the principle first enunciated, and which 
seems to be firmly established, — that the whole wealth of a civ- 
ilized nation is in a state of constant flax and renovation, the ap- 
parent stability and unchangeableness of the fortunes of individuals 
offering no exception to this principle. The instance analyzed also 
proves that a profit, an addition to the national stoclv, is made 
only at and by these successive changes of form. What is incon- 
sumable is also necessarily unproductive. We consume in order 
that we may produce, and we mtist consume before we can produce. 
The wealth which is literally locked up or buried only rots or 
rusts ; and we might just as well bury only stones or sand in its 
place. But money or wealth is not locked up when placed in banks, 
institutions for savings, — moneyed corporations, as they are called, 
— and the like. These institutions are nothing but contrivances 
for collecting it, setting it in motion, and making it circulate 
around us, like the atmosphere which we breathe. The wealth which 
would otherwise be scattered in many little hoards, remaining idle 
because owned by those whose circumstances would not allow them 
to use it to advantage, or because the separate sums were too small 
to admit of a profitable application, is, by these means, brought 
together and made as efficient as the vast accumulations of great 
capitalists. The aggregate thus formed is made to do its full part 
in supplying the lungs of industry, keeping it alive and active, and 
making all the parts of the body politic and social contribute to 
the sustenance and growth of the w^hole. The fifty millions in the 
Savings' Banks, and the sixty-seven millions of capital in the banks 
of deposit and circulation, (I speak only of Massachusetts,) do not 
rest there, but are, at this moment, circulating around us, — driv- 
ing the wheels of our factories, supplying oiu- mechanics with tools 
and our tradesmen with goods, building and freighting our ships, 



10 THE AIMS, LIMITATIONS, AND ADVANTAGES 

bringing to us the productions of all habitable climes, hurrying 
from one task to another with indefatigable ardor, and assuming a 
thousand different forms and hues, according to our necessities and 
desires. 

" What is annually saved," says Adam Smith, "is as regiJarly 
consumed as what is annually spent, and nearly in the same time 
too ; but it is consumed by a different set of people. That portion 
of his revenue which a rich man annually spends is, in most cases, 
consumed by idle guests and menial servants, who leave nothing 
behind them in return for their consumption. That portion which 
he annually saves (as, for the sake of the profit, it is immediately 
employed as a capital) is consumed in the same manner, and nearly 
in the same time too, but by a diflPerent set of people, — by laborers, 
manufacturers, and artificers, who reproduce, with a profit, the 
value of their annual consumption." 

We are now entitled to assume that the theory of wealth is a 
large and complicated one, embracing many curious and difl&cult 
problems, and resting upon many general principles or laws, the 
discovery and development of which constitute a distinct and im- 
portant science. One of these laws or general facts — the trans- 
mutations of capital — has been pointed out and briefly elucidated. 
And we perceive that it is a fruitful one, pregnant with important 
conclusions and inferences respecting the institution of property 
and the modes of favoring industry and increasing national wealth. 
If the science has been successfully cultivated, many more such 
general laws must have been discovered in it, a knowledge of which 
is important to the statesman, the merchant, and the philanthro- 
pist. As Political Economy is expounded in the books, whether 
by Adam Smith, Ricardo, Sismondi, or Mill, it may, or may not, 
be well founded and trustworthy in all its parts. Authorities differ 
on many points. But these men have not been studying a mere 
chimera, or wasting their energies in a vain pursuit. There are 
general laws affecting the production and distribution of wealth, ' 
whether they have been discovered or not ; and a knowledge of 
these laws is a very different thing from the practical knowledge, 
the acquaintance with details, and the natural shrewdness, which 
enable a man to acquire property, and to take good care of it when 
acquired. 



OF THE STUDY OF POLITICAL ECONOMY. 11 

And this leads me to remark that Political Economy is not, as 
many suppose, the art of money-making, any more than meteorol- 
ogy is the art of predicting the weather. It is no art at all, but a 
science; for its immediate end is knowledge, not action or the 
guidance of conduct. The meteorologist says that the phenomena 
of the atmosphere and the weather, iiTegular as they are in their 
occrn'rence, and obscure as to their immediate causes, must depend 
on the general principles of gravity and the equilibrium of fluids, 
and must be refei-able to general laws, which are legitimate objects 
of investigation. He may have studied these laws successfully, 
and still not be so able as an old sea-captain is, who never opened 
a book on meteorology in his life, to tell what the weather will be 
the next hour or the next day. It is a point of as much interest 
and importance to know hoiv a storm occurs, as to know when it 
will recur. So, after one of those storms in the commercial world 
which are known as " commercial crises," we may reasonably seek 
an explanation of the phenomenon, or the cause of its occurrence, 
though this knowledge should not enable us to tell when another 
and similar disturbance will happen. 

The general principles of any science are obtained only by ab- 
straction, — by leaving out of view many of the details and par- 
ticvdars which actually belong to the case, and thus so far simpli- 
fying it that we can reason about it with facility. The conclusions 
at which we arrive by this process are very comprehensive, but do 
not admit of immediate application. They are true only with cer- 
tain qualifications and restrictions. They are involved in all the 
phenomena to which they relate, and have a share in producing 
them ; but they do not determine the whole of these phenomena. 

Political Economy, Mr. Mill remarks, is a deductive science, so 
far as it reasons from assumptions, not from facts. " It supposes 
an arbitrary definition of a man, as a being who invariably does 
that by which he may obtain the gi'eatest amount of necessaries, 
conveniences, and luxuries with the smallest quantity of labor and 
physical self-denial with which they can be obtained in the existing 
state of knowledge. It predicts only such of the phenomena of 
the social state as take place in consequence of the pursuit of 
wealth. It makes entire abstraction of every other human pas- 
sion or motive, except those which may be regarded as perpetually 
antagonizing principles to the desire of wealth, — namely, aversion 



12 THE AIMS, LIMITATIONS, AND ADVANTAGES 

to labor, and desire of the present enjoyment of costly indulgen- 
ces." 

" The conclusions of Political Economy, consequently, like those 
of Geometry, are only true, as the common phrase is, in the ab- 
stract; that is, they are only true under certain suppositions, in 
which none but general causes — causes common to the whole 
class of cases under consideration — are taken into the account. 
In proportion as the actual facts recede from the hypothesis, the 
Political Economist must allow a corresponding deviation from the 
strict letter of his conclusion ; otherwise, it will be true only of 
things such as he has arbitrarily supposed, not of such things as 
really exist. That which is true in the abstract is always true in 
the concrete, with proper allowances. When a certain cause really 
exists, and, if left to itself, would infallibly produce a certain effect, 
that same effect, modified by all the other concurrent causes, will 
correctly correspond to the result really produced." 

All legislation which is designed to affect the economical inter- 
ests of society, or which relates immediately to its commerce, 
agriculture, or manufactures, is, in truth, an application of the 
principles of some system of Political Economy to practice, be that 
system a wise or a mistaken one. It is often a very injurious 
application of them, because the circumstances which actually 
limit the principles are lost sight of, and the abstractions by which 
they were obtained are forgotten. Mischief results ; and " practi- 
cal men," seeing that the consequences do not squai'e with the 
theory, call in question the science itself, instead of attributing 
the error to the faulty application of it. Hence arises an unhappy 
dissension between theory and practice, to the lasting detriment 
of both. 

The Political Economists themselves are somewhat to blame for 
this result, by pressing too eagerly for the reduction of their 
favorite doctrines to practice, without regard to the particular cir- 
cumstances of each case. The general doctrine of Free Trade, for 
instance, which may be correct when applied to two nations which 
are similarly situated in every respect, which have grown up under 
the same institutions and the same laws, and in which the profits 
of capital, the wages of labor, and the ratio of population to terri- 
tory are nearly on a level, is extended, by a hasty generalization, to 
two countries that are contrasted with each other in all these re- 



OF THE STUDY OF POLITICAL ECONOMY. 13 

spects, and in its application to which, to say the least, the correct- 
ness of the principle is very doubtful. We have in this country 
the largest extension of the system of Free Trade which the world 
has ever witnessed ; we have free trade between Maine and Louis- 
iana, between California and Massachusetts ; and no one doubts 
that the system is equally beneficial to all these States. But be- 
fore the system is carried out between England and the United 
States, we may reasonably inquire whether it will not necessarily 
tend to an equalization of profits and wages in the two countries, 
and whether it is desirable here to hasten the operation of the 
causes which are rapidly reducing the rates of both to the English 
standard. This subject will be considered hereafter ; but I may 
say here, that the question does not relate to the correctness of the 
general principle in economical science, but only to its applicability 
under particular circumstances. That all terrestrial bodies gravi- 
tate to the centre of the earth is a general law, which is not dis- 
proved by the floating of a cork in a basin of water. 

Another prejudice against Political Economy has arisen from an 
error of an opposite character, — from too strict a limitation of it 
to the causes affecting the increase of national wealth, the other 
interests of a people being undervalued or left out of sight. The 
English Economists of Ricardo's school have most frequently fallen 
into this error ; looking merely to the creation of material values, 
they have tacitly assumed that this was the only interest of 
society, the only end which legislation should have in view. The 
proposition on which they act, though they seldom directly enim- 
ciate it, is, that the augmentation of national wealth is at once the 
sign and the measure of national prosperity. We may admit that 
it is so, if the wealth he distributed with some approach to equality 
among the people. But if the vast majority of the nation is 
beggared, while enormous fortunes are accumulated by a few, — 
if pauperism increases at one end of the social scale as rapidly as 
wealth is heaped up at the other, — then, even though the ratio 
of the aggregate wealth to the aggregate population be constantly 
growing larger, the tendency of things is downward, and, sooner or 
later, if a remedy be not applied, society will rush into degrada- 
tion and ruin. 

In order to obtain a broader field of inquiry, the subject to be 
discussed in this volume will be, the general ivell-heing of society, so 



14 THE AIMS, LIMITATIONS, AND ADVANTAGES 

far as this is affected hy the moral causes regulating the production, 
distribution, and consumption of wealth. It may be doubted 
whether the whole of this theme is included within the limits of 
Political Economy properly so called ; and therefore I propose 
to consider not only the science itself, but its application to a par- 
ticular case, — the circumstances and institutions of the American 
people. Hitherto, history has been in the main a political record, 
— a narrative of wars, conquests, and changes in the form of gov- 
ernment. But the social economy of different states has now be- 
come the chief object of interest, even to the historian. Statesmen 
have been obliged to make the study of politics second to that of 
political economy. The idea of political freedom, of choosing 
their own governors and managing their own affairs, is no longer 
attractive enough to lead the people, if it be not united with some 
project for a new organization and a more equal enjoyment of the 
goods of this life. Hence the rise of so many schemes of Social- 
ism and Communism, which gave a character to the Revolutions 
of 1848 wholly unlike that of any other political disturbances re- 
corded in the previous history of the world. 

Even if the disastrous consequences of the insane attempts then 
made to reorganize society should prevent a speedy repetition of 
the experiment, there is another danger, from which no civilized 
community is entirely free, — lest the several classes of which it 
is composed should cherish mutual jealousy and hate, which may 
finally break out into open hostilities, under the mistaken idea 
that their interests are opposite, and that one or more of them 
possess an undue advantage, which they are always ready to exer- 
cise in oppressing the others. We need, therefore, to explain and 
teach the great truths which Political Economy has demonstrated ; 
— that all classes of society are inseparably bound together by a 
community of interest ; that the prosperity of each depends on 
the welfare of all ; that the national industry must be meagre and 
profitless in its results if it has not capital or concentrated wealth 
to co-operate with it ; that an equal division of property would, in 
fact, destroy or dissipate that which was divided ; and that the 
only equality of condition which human nature renders possible 
is an equality of destitution and suffering. 

I need not apologize for the science which treats of the creation 
of wealth, on the ground that it relates only to one of the lower 



OF THE STUDY OF POLITICAL ECONOMY. 15 

interests of humanity, and that it is not of so much moment for 
an individual or a society to be rich, as it is, to be wise, free, in- 
structed, and virtuous. It is true that wealth is one of the lower 
elements or supports of civilization, and that the comparative 
quantity of it is but an imperfect index of national worth and 
national well-being. But it is also true that wealth is that 
element of civilization which supports all the others, and that 
without it no progress, no refinement, no liberal art would be pos- 
sible. Without property, without large accumulations of wealth, 
no division of labor would be possible ; and without division of 
labor, each man must provide by his own toil for all his bodily 
wants. He must plant, sow, and reap for himself. He must be 
his own tailor, shoemaker, hou^sewright, and cook. The scholar 
could no longer devote himself exclusively to his books, the man 
of science to the observation of nature, the artist to the canvas or 
marble, the physician to the cure of diseases, or the clergyman to 
the care of souls. All would be bound alike by the stern neces- 
sity of daily brutish toil on the most repulsive tasks. National 
wealth is a condition of progress, — a prerequisite of civilization. 
It is not in itself ennobling ; but it is that which vivifies and main- 
tains all the other elements and influences which dignify humanity 
and render life desirable. 

Even if popular ignorance and prejudice upon this subject were 
not dangerous to the state, a liberal curiosity would not rest satis- 
fied w'ithout some knowledge of the laws affecting the creation and 
production of wealth, — laws which are, in truth, as constant and 
uniform as those which bind the material universe together, and 
evince the wisdom and goodness of the Creator quite as clearly as any 
of his aiTangements in the organic kingdom. It is true that men 
are usually selfish in the pursuit of wealth ; but it is a wise and 
benevolent arrangement of Providence, that even those who are 
thinking only of their own credit and advantage are led, uncon- 
sciously but surely, to benefit others. The contrivance by which 
this end is effected — this reconciliation of private aims with the 
public advantage — is often complex, far-reaching, and intricate ; 
and thus more strongly indicates the benevolent purpose of the 
Designer. In the instance already given, we have seen that the 
wealth of an individual, perhaps a sordid and covetous one, in- 
vested by him with a view only to his own advantage and security, 



16 THE AIMS, LIMITATIONS, AND ADVANTAGES. 

and to spare himself the trouble of superintending it, still circu- 
lates through the community without his knowledge, supporting 
the laborer at his task, supplying means to the ingenious and the 
enterprising for the furtherance of their designs, and assuming with 
facility every shape which the necessities or the convenience of 
society may require. 

" Let any one propose to himself," says Dr. Whately, " the prob- 
lem of supplying with daily provisions of all kinds a city like Lon- 
don, containing about two millions of inhabitants. Let him im- 
agine himself a head commissary, intrusted with the office of 
furnishing to this enormous host their daily rations. A failure in 
the supply even for a single day might produce the most frightful 
distress. Some, indeed, of the articles consumed might be stored 
up in reserve for a considerable time ; but many, including most 
articles of animal food and many of vegetable, are of the most 
perishable nature. As a deficient supply of these, even for a few 
days, would occasion great inconvenience, so a redundancy of them 
would produce a corresponding waste. The city is also of vast ex- 
tent, — a province covered with houses, — and it is essential that 
the supplies should be so distributed as to be brought almost to 
the doors of all the inhabitants. The supply of provisions for an 
army or garrison is comparatively uniform in hiiid ; but here, the 
greatest possible variety is required, suitable to the wants of the 
various classes of consumers. Again, this immense population is 
extremely fluctuating in numbers ; and the increase or diminution 
depends on causes of which some may, others cannot, be distinctly 
foreseen. Again, and above all, the daily supplies of each article 
must be so nicely adjusted to the stock from which it is drawn, to 
the scanty or abundant harvest, importation, or other source of 
supply, to the interval which must elapse before a fresh stock can 
be furnished, and to the probable abundance of the new supply, 
that as little distress as possible may be felt ; — that, on the one 
hand, the population may not unnecessarily be put on short allow- 
ance of any article, and, on the other, may be preserved from the 
more dreadful risk of famine, which must happen if they contin- 
ued to consume freely when the stock was insufficient to hold out. 

" Now let any one consider this problem in all its bearings, and 
then reflect on the anxious toil whjph such a task would impose on 
a board of the most experienced and intelligent commissaries, — 



OF THE STUDY OF POLITICAL ECONOMY. 17 

who, after all, could discharge their office but very inadequately. 
Yet this object is accomplished, far better than it could be by any 
effort of human wisdom, through the agency of men who think 
each of nothing beyond his own immediate interest, — who, with 
that object in view, perform their respective parts with cheerful 
zeal, and combine unconsciously to employ the wisest means for 
effecting an object, the vastness of which it would bewilder them 
even to contemplate. 

"It is really wonderful to consider with what ease and regularity 
this important end is accomplished, day after day, and year after 
year, through the sagacity and vigilance of private interest operat- 
ing on the numerous class of wholesale, and more especially retail, 
dealers. Each of these watches attentively the demands of his 
neighborhood, or of the market he frequents, for such commodi- 
ties as he deals in. The apprehension, on the one hand, of not 
realizing all the pi'ofit he might, and, on the other, of having his 
goods left on his hands, — these antagonist muscles regulate the 
extent of his dealings and the prices at which he buys and sells. 
An abundant supply causes him to lower his prices, and thus en- 
ables the public to enjoy that abundance ; while he is guided only 
by the apprehension of being undersold. On the other hand, an 
actual or apprehended scarcity causes him to demand a higher 
price, or to keep back his goods in expectation of a rise. Thus he 
co-operates, unknowingly, in conducting a system which no human 
wisdom directed to that end could have conducted so well, — the 
system by which this enormous population is fed fi'om day to day. 

" I say, ' no human wisdom ' ; for tcisdom there surely is, in this 
adaptation of the means to the result actually produced. In this 
instance, there are the same marks of benevolent design which we 
are accustomed to admire in the anatomical structure of the hu- 
man body. I know not whether it does not even still more excite 
our admiration of the beneficent wisdom of Providence, to con- 
template, not corporeal particles, but rational fi'ee agents, co-oper- 
ating in systems not less manifestly indicating design, but no design 
of theirs ; and though acted on, not by gravitation and impulse, 
like inert matter, but by motives addressed to the wUl, yet accom- 
plishing as regularly and as effectually an object they never con- 
templated, as if they were merely the passive wheels of a machine." 

It is on a large induction from such cases as this, that political 
a 



18 THE LAISSEZ-FAIRE PKINCIPLE. 

economists rest their most comprehensive and most noted maxim, 
— the laissez-faire, or "let-alone," principle, — the doctrine of non- 
interference by the government with the economical interests of 
society. True, these interests are in the hands of individuals, who 
look only to their own immediate profit, and not to the public ad- 
vantage, or to the distant future. They are not only selfish ; they 
are often ignorant, short-sighted, and unconscious of much of the 
work that they do. But society is a complex and delicate machine, 
the real Author and Governor of which is divine. Men are often 
his agents, who do his work, and know it not. He turneth their 
selfishness to good ; and ends which could not be accomplished by 
the greatest sagacity, the most enlightened and disinterested public 
spirit, and the most strenuous exertions of human legislators and 
governors, are effected directly and incessantly, even through the 
ignorance, the wilfulness, and the avarice of men. Man cannot 
interfere with His work without marring it. The attempts of legis- 
lators to turn the industry of society in one direction or another, 
out of its natural and self-chosen channels, — here to encourage it 
by bounties, and there to load it with penalties, — to increase or di- 
minish the supply of the market, to establish a maximum of price, 
to keep specie in the country, — are almost invariably productive 
of harm. Laissez faire ; "these things regulate themselves," in 
common phrase ; which means, of course, that God regulates them 
by his general laws, which always, in the long run, work to good. 
In these modem days, the ruler or governor who is most to be 
dreaded is, not the tyrant, but the busybody. Let the course of 
trade and the condition of society alone, is the best advice which 
can be given to the legislator, the projector, and the reformer. 
Busy yourselves, if you must be busy, with individual cases of 
wrong, hardship, or suffering ; but do not meddle with the general 
laws of the universe. 

The limitations of this " let-alone " principle are nearly as ob- 
vious as the principle itself. The office of the legislator is not, by 
his own superior wisdom to chalk out a path for society to move 
in, but to remove all casual and unnatural impediments from that 
path which society instinctively chooses for itself. Human laws, 
if wisely framed, are seldom mandatory, or such as require an 
active obedience ; they are mostly prohibitive, or designed to pre- 
vent such action on the part of the few as would impede or limit 



THE LAISSEZ-FAIRE PRINCIPLE. 19 

the healthful action of the many. Vice and crime, for instance, 
are stumbling-blocks in the path of the community ; they obstruct 
the working of the natural laws, the ordinances of Divine Provi- 
dence, by which society is held together and all well-meaning 
members of it are made to co-operate, though unconsciously, for 
each other's good. To remove such stumbling-blocks, then, is not 
to create, but to prevent, interference with the natural order of 
things. Legislation directed to this end is only a legitimate caiTy- 
ing out of the laissez-faire principle. 

The enforcement of justice in the ordinary transactions between 
man and man, which often requires further legislation than is 
needed for the mere prevention of open vice and crime, is another 
instance of the legitimate exercise of authority by the govern- 
ment. An individual may not erect a powder-manufactory in the 
midst of a populous village, nor carry on any operations there 
which would poison the air with noxious exhalations. His neigh- 
bors would have a right to call out to him, " Let us alone ; you 
endanger our lives, and prevent us from pm'suing our ordinary 
occupations in safety." 

These are internal impediments to the natural action of society, 
and as such the government is bound to put them out of the way. 
But it is also the duty of the legislature to guard society against 
external dangers and hindrances. Men are separated into distinct 
communities, the action of which upon each other is not so much 
restrained by law, or by the natm-al requisitions of justice, as is 
that of individuals dwelling in the same community. The law of 
nations is a very imperfect code, and, from the want of any supe- 
rior tribunal to enforce its enactments, it is very imperfectly ob- 
served. War is either a present evil to be averted or alleviated, 
or it is a possible future event, the occuirence of which is to be 
guarded against. For either of these ends, the action of individ- 
uals within the community may need to be restrained ; for the 
safety of all, the freedom of all to pursue their lawful occupations 
without let or hindrance is not to be imperilled through the ava- 
rice or recklessness of a few. Accordingly, not mere restraints 
upon importation, but an absolute prohibition of intercourse, an 
embargo on all navigation, are among the legitimate measures, a 
necessity for which is created by national dissension and hostility. 

Independent communities are not always at war with each 



20 THE LAISSEZ-FAIRE PRINCIPLE. 

other ; but they are always rivals and competitors in the great 
market of the world. This feeling of rivalry is whetted by the 
different circumstances imder which they are placed, by the pecu- 
liarities in the condition of each, and by the opposition of interests 
which often grows out of these peculiarities. The legislation of 
each state is primarily directed, of course, to the protection and 
promotion of the interests of its own subjects ; and thus it often 
injuriously affects the interests of other nations. There is, there- 
fore, a good deal of retaliatory legislation on the part of different 
governments. There is often, on both sides, a keen measure of 
wits in devising commercial regulations which shall affect, or ren- 
der nugatory, measiu-es adopted by the rival nation, not exactly 
with a hostile intent, but with an exclusive view to its own inter- 
ests, and therefore frequently with an injurious effect upon the in- 
terests of others. Now, such retaliatory legislation, so far as it 
operates upon the members of the very community from which it 
emanates, so far as it limits or restrains the action of all or a por- 
tion of them, is not an infringement, but an application, of the 
laissez-faire principle. It is designed to procure for them a larger 
liberty than they would otherwise enjoy ; if it is effectual, if it 
answers its purpose, it removes an impediment created by a foreign 
state, far more serious and extensive than the obstruction which it 
imposes. 

The policy of states leads them to seek independence of each 
other in their economical, almost as much as in their political, 
relations ; or we might better say that political independence 
requires that we shotild not be entirely dependent upon foreigners 
for the supply of great articles of prime necessity, — that we 
should have within our own borders, and under our own control, 
the means of satisfying all our natural and imperative wants. It 
is not desirable that Massachusetts and Ohio should be rendered 
so far independent of each other that each could obtain from 
its own soil, or by the labor of its own inhabitants, all that it 
can need ; for these two States are one in most of their political 
relations. Members of the same great confederacy, living under 
the same laws, and each exercising its due share of influence in 
the national legislature, neither has cause to apprehend the hostile 
or injurious action of the other. The political ties between them 
are strengthened by their dependence on each other for a supply 



THE LAISSEZ-FAIRE PRINCIPLE. 21 

of many of the necessaries of civilized existence. But it is desira- 
ble that both should be independent, as far as may be, of the 
great powers of Europe, with whom they cannot be sure of con- 
tinued friendly intercourse for any time beyond the present, and 
from whom they are always separated by a great breadth of ocean, 
and by dissimilarity of customs, institutions, and laws. 

True independence, in an economical point of view, does not re- 
quire us to forego all commercial intercourse with other nations ; 
this would be rather a curse than a blessing. But it does requirr 
that each nation should be able to exercise, within its own limits, 
all the great branches of industry designed to satisfy the wants of 
man. It must be able to practise all the arts which would be 
necessary for its own well-being if it were the only nation on the 
earth. If it be restricted to agriculture alone, or to manufactures 
alone, a portion of the energies of its people are lost, and some of 
its natural advantages run to waste. To be so limited in its 
sphere of occupation, to be barred out from some of the natural 
and necessary employments of the human race, through the over- 
whelming competition of foreigners, is a serious evil, which it is 
the object of a protective policy to obviate or redress. On what- 
ever other grounds this policy may be olijected to, it is surely not 
open to the charge of being an infringement of the laissez-faire 
principle, or a restriction of every man's right to make such use as 
he pleases of his own industry and capital. Its object is, not to 
narrow, but to widen, the field for the profitable employment of 
industry, and to second the working of the beneficent designs of 
Providence in the constitution of society, by removing all artificial 
and unnecessary checks to their operation. 

I repeat it, then, that these designs, as shown in the economical 
laws of human natiire (i. e. in the principles of Political Econo- 
my) through their general effects upon the well-being of society, 
manifest the contrivance, the wisdom and beneficence, of the Deity, 
just as clearly as do the marvellous arrangements of the material 
universe, or the natural means provided for the enforcement of the 
moral law and the punishment of crime. The lowest passions of 
mankind, — ostentation and ambition, petty rivalry, the love of 
saving and the love of gain, — while they brjng their own penalty 
upon the individual who imduly indulges them, are still overruled 
for good in their operation upon the interests of society ; nay, they 



22 THE PRODUCTION OF WEALTH : 

are made the most efficient means of guarding it from harm, and 
advancing its welfare. In the vast round of employments in civ- 
ilized society, there is hardly one in which a person can profitably 
exert himself, without at the same time profiting the community 
in which he lives, and lending aid to thousands of human beings 
whom he never saw. We are all servants of one another without 
wishing it, and even without knowing it ; we are all co-operating 
with each other as busily and effectively as the bees in a hive, and 
most of us with as little perception as the bees have, that each 
individual effort is essential to the common defence and general 
prosperity. 



CHAPTER II. 

HOW WEALTH IS CEEATBD, AND WHAT CONSTITUTES EXCHANGEABLE 
VALUE : THE MEASURE OF VALUE : HOW WEALTH IS DISTRIBUTED 
, AMONG ITS PRODUCERS. 

A DISTINCTION has been briefly pointed out between wealth and 
property. Wealth consists of the aggregate of articles, chiefly 
material or tangible, though some immaterial products are ranked 
among them, which supply the wants and satisfy the desires of 
man ; and the stock of national wealth " is kept in existence from 
age to age, not by preservation, but by perpetual reproduction. 
Every part of it is used or destroyed, — ; generally very soon after 
it is produced ; but those who consume it are employed meanwhile 
in producing more," — not only enough to replace what is con- 
sumed, but to furnish a surplus, or profit. Property is the owner- 
ship of these articles, and often remains unchanged, or fixed, for 
many generations, — just as the river continues, though the water 
is perpetually running out of it into the sea. 

As the articles change while the ownership continues, there must 
be evidences of that ownership, or " tickets of transfer," as I have 
once called them, — mere representatives of wealth, which command 
a price in the market, and are often sold, but which, in themselves, 
form no addition to the national wealth. Notes and mortgages, 
bank-bills, bank-stock, stock in any corporation or in the national 



THE NATURE OF EXCHANGEABLE VALUE. 23 

debt, are such representatives. They are mere evidences that the 
person holding them is the owner of a larger or smaller portion of 
those articles which really constitute wealth ; and their value to 
him consists only in the fact that they enable him, whenever he 
sees fit, to reclaim his property, or to take possession of those ar- 
ticles which actually belong to him, though for a time he has 
trusted them to others. 

The national wealth, therefore, does not consist of the land, the 
houses, the manufactured goods, etc., jt:)^«5 the public funds, bank- 
stock, and the like. These funds and stocks are not wealth in 
themselves, but are certificates of oxvnersliip of those articles which 
really constitute riches. Nay, if any portion of these stocks is 
held by foreigners, the aggregate wealth of the community does 
not consist even of the whole amount of those articles within its 
territory which are properly considered as wealth, but only of that 
amount minus the evidences of indebtedness to foreigners. If I 
buy $ 1,000 worth of government securities, I really lend $ 1,000 
to the government, which, in return, mortgages to me a portion 
of its revenues, or of the sum which it annually raises by taxation. 
This sum is that portion of the valuable articles annually created 
by the labor of the community which the government appropriates 
to itself, as a compensation for the care and protection which it 
affords. What I really own, then, is this share of the useful ar- 
ticles annually produced by the labor of the whole people, which 
is transferred, first by the people to the government, and then by 
the government to me. The scrap of paper, called " public stock," 
which I hold, is of no value whatever, except as it enables me to 
claim without dispute my share of this annual product. 

These truths ax-e elementary, and sufficiently obvious ; but it 
was necessary to state them in order to clear the ground for the 
solution of the problem with which we are now concerned : — 
WJiat are the essential qualities of wealth, and how is it created ? 
How is it, that the national stock of wealth, which we are perpet- 
ually consuming, is yet perpetually reproduced, and that, too, with 
a profit, or constant enlargement, so that the stock at the end of 
the year is considerably larger than it was at the year's commence- 
ment ? 

As soon as we clearly perceive that wealth consists exclusively of 
those useful articles, chiefly material or tangible, which have been 



24 THE PEODUCTION OF WEALTH : 

indicated, and that we have nothing to do with the intricate com- 
plications of property which arise from the deahngs of men in the 
banks and the stock-market, the answer to this question becomes 
very easy. Wealth is created hy devoting human labor to the pro- 
duction and fashioning of these useful articles ; — by tilling the 
ground, and raising harvests of food and of the raw materials for 
manufacture ; by , spinning, weaving, and sewing ; by erecting 
houses, working mines, and building ships ; by any and every ap- 
plication of industry which is essential to the full enjoyment of 
these articles, or which has directly or indirectly concurred in their 
formation. Human labor, whether skilful or unskilful, whether 
applied alone or artfully assisted by natural agents, is the means ; 
wealth is the product. Whatever is necessary in order that the 
workman may apply himself more directly and successfully, and 
with less interruption, to his task, must be considered as a portion 
of the industry which concvirs in the formation of the article pro- 
duced by that workman. 

Thus, he must feel secure in his employment, — secure against 
violence, robbery, or any improper or wrongful interruption of his 
labor. Government affords him this security, and is, to this ex- 
tent, a coworker and fellow-producer with him, so that it rightful- 
ly claims a share — a very small share — of the finished product. 
" On the governor, and those with whom he is associated, or whom 
he appoints," says Mr. Senior, " is devolved the care of defending 
the community from violence and fraud ; and so far as internal 
violence is concerned, and that is the evil most dreaded in civilized 
society, it is wonderful how small a number of persons can provide 
for the security of multitudes. About 15,000 soldiers, and not 
15,000 policemen, watchmen, and officers of justice, protect the 
persons and property of the eighteen millions of inhabitants of 
Great Britain." 

The co-operation which the laborer requires, in a highly civilized 
community, for the completion of his task, in order to present the 
article in a state fit for use, is far more extensive than we are apt, 
at first sight, to imagine. Thus, bread is a finished product, the 
total value of which must compensate a long line of laborers who 
have conciu'red in its formation. The tradesman who brings it to 
your door ; the baker ; the miller ; the farm-laborers who plough, 
sow, and reap ; the farmer or land-owner ; and all the artisans 



THE NATUKE OF EXCHANGEABLE VALUE. 25 

who have fabricated all the tools and instruments used by these 
persoias, — must all have their share of the price finally paid for 
the bread which is fully prepared to be eaten. The extensive co- 
operation of employments, produced by the minute subdivision of 
labor, is the most striking feature of modem civilization. The ob- 
ject of this immense subdivision is to secure the greatest possible 
efficiency of labor ; — that everything may be produced on the spot 
best suited for its production ; that every step in the process of 
its manufacture may be taken by the person most capable of tak- 
ing it to advantage, and under the most favorable circumstances ; 
and that the article itself, when finished, may be adapted, even in 
the slightest particulars, to the wants, tastes, and convenience of 
those who are to use it. The value which may be added to the 
article by the numerous steps of this long process may be very 
gi-eat. " We should probably be understating the difference," says 
Mr. Senior, " if we were to say that the last price was a thousand 
times the first. The price of a pound of the finest cotton-wool, as 
it is gathered, is less than two shillings. A pound of the finest 
cotton lace might easily be worth more than a hundred guineas." 

We gain another view of this marvellous co-operation of individ- 
uals, designed to make labor most efficient, by searching out the 
history, analyzing the cost, and tracing the processes of manufac- 
ture, of all the articles of our own daily consumption. We think 
it little to sit down to a table covered with articles from all quar- 
ters of the globe and from the remotest isles of the sea ; — with 
tea from China, coffee from Brazil, spices from the East, and sugar 
from the West Indies ; knives from Sheffield, made with iron from 
Sweden and ivory from Africa ; with silver from Mexico, and cotton 
from South Carolina ; all being lighted with oil brought from New 
Zealand or the Arctic Circle. StiU less do we think of the great 
number of persons whose united agency is required to bring any 
one of these finished products to our homes, — of the merchants, 
insurers, sailors, ship-builders, cordage and sail makers, astronom- 
ical-instrument makers, men of science, and others, who must con- 
cur before a pound of tea can appear in our market. In view of 
these circumstances, it is no exaggeration to say, that the humble 
artisan, who spends his life — to adopt Adam Smith's illustration — 
in making the eighteenth part of a pin, and is hardly fitted for any 
higher employment, still taxes the industry of half the human 



26 THE PRODUCTION OF WEALTH : 

race, and lays under contribution the four quarters of the globe, 
to supply his daily wants. 

How is it that, while, in these days, men will not often labor for 
nothing, and while the artisan himself produces nothing but the 
fraction of a pin, he is still able to consume so great a variety of 
products, and to make the industry of so vast a multitude tribu- 
tary to his comforts 1 The answer may be given in one word, — 
by exchange. As human labor is the only motive power, so capa- 
hility of exchange is the sole directing agent, in the great social 
machine for the production of wealth. The immediate measure 
of the wealth, when produced, is, not its utility, but its exchangeable 
value ; and Political Economy itself, as I have already remarked, 
has been denominated Catallactics, or the Science of Exchanges. 

We come, then, to an analysis of exchangeable value, in order to 
find a basis for the theory of wealth. What is it that constitutes 
value in exchange, and why do various articles possess it in such 
unequal proportions'? The answer is, that exchangeable value 
consists of two elements, — utility, and difficulty of attainment. 
The article valued must in some measure be useful ; that is, it 
must be adapted to satisfy, either directly or indirectly, some nat- 
ural want or artificial desire of men : and it must also be more or 
less difficult to be had. These elements may coexist in very dif- 
ferent proportions ; but, in one degree or another, they must both 
be present, or the article has no value in exchange. It may, for 
instance, be very useful ; it may be an ai*ticle of prime necessity, 
absolutely essential to the existence of man. Yet if there be no 
difficulty in the way of its attainment, if, like the air, the water, 
and the sunlight, the supply of it be inexhaustible, and open to all 
the world, then it has no exchangeable value. It forms no part 
of what is usually called wealth. Supply the element which was 
lacking, — only make the article hard to be procured, as water is 
in the midst of the sandy desert of Sahara, or as air was to Mr. 
Hoi well and his companions in the Blact Hole at Calcutta, — and 
men will give all that they have in the world for a single draught of 
either. On the other hand, it may be very difficult of attainment ; 
it may, like some of the most refined products of chemical analy- 
sis, require the labor of years, the greatest scientific skill, and an 
expenditure of the most costly materials, before it can be procured. 
Yet if it be not useful, if it do not satisfy some want or desire, 



THE NATURE OF EXCHANGEABLE VALUE. 27 

— however artificial or irrational that desire may be, — it com- 
mands no price in the market ; it has no exchangeable value. 

But we do not here speak of abstract utility, or of that utility 
which is determined by reason and measured by a philosophical 
standard. Utility here means nothing but fitness or capability to 
satisfy any desire of men, however unreasonable, extravagant, or 
capricious that desire may be. If men are so foolish as to pi'ize 
highly many articles which answer no purposes but of vain osten- 
tation or gross and sensual enjoyment, it is not for the political 
economist, who views things only as they are, — not as they ought 
to be, — to censure their folly. He leaves this office to the moralist 
or the preacher. The fact that such articles are coveted, from what* 
ever motive, is enough to bring them within his definition of 
wealth ; which definition, it is evident, only expresses the common 
sentiment of mankind. 

As the words value and utility are often used in the moralist's 
sense, or according to their philosophical import, it is necessary to 
give this caution once for all, — that whenever in future they are 
here i;sed, they must be understood only in their politico-economi- 
cal signification. By value, we mean only exchangeable value ; by 
utility, we mean only that utility which is an element of wealth, 
and which consists in fitness to satisfy any want or desire, however 
in-ational, that is felt by any number of men. 

This analysis of value, this explanation of what wealth is, leads 
us immediately to an understanding of the manner in which wealth 
is created. As the essence of value consists in difficulty of attain- 
ment, so the labor which overcomes that difficulty is the great 
means of producing value, or creating wealth ; and everything 
which diminishes that difficulty is to be considered as labor, — is 
entitled to be called by that name, for it is recognized and compen- 
sated as such by the community. And here is the great paradox 
of Political Economy : — Value depends on difficulty of attainment ; 
the only way of creating values is to lessen or overcome that diffi- 
culty ; but as soon as all difficulty is overcome, when there is no 
longer any obstacle in the way between man and the gi-atification 
of his desire, then exchangeable value also disappears, and the 
boundless wealth, which seemed just within our grasp, is suddenly 
changed, as by a magical incantation, into dross or nothingness. 

This paradox is not created merely by an abuse of abstract defini- 



28 THE PKODUCTION OF WEALTH : 

tions and theoretical reasoning. The seeming contradiction is a 
literal fact, as may be clearly shown by a practical illustration. 
Gold surely possesses the highest value in exchange, and is emi- 
nently difficult of attainment. The story, first promulgated in the 
■winter of 1848-49, that it abounded in the soil of California, 
caused as much excitement and agitation in this country, and in- 
deed throughout the civilized world, as would have been created 
by another battle of Waterloo. Did it ever occur to any of the 
gold-hunters at that time, that their hopes would be just as much 
frustrated by finding that the precious metal there was too plenti- 
ful, as by ascertaining that it was not to be found at all 1 Let us 
suppose that the most exaggerated reports had been correct, — 
that all the rocks of the Sierra Nevada itself were composed in 
great part of gold, — that there were gold mountains in California, 
just as there are iron mountains in Missouri. Is it not certain 
that the value of gold aU over the world, almost at once, would 
sink to about the same point with iron 1 Then carry the supposi- 
tion one step farther. Imagine that it is not necessary to go to 
California for this metal, but that our own streets are paved and 
our gutters lined with gold, which also, in lumps, strews the whole 
face of the country. Is it not evident, that it would instantly be- 
come as valueless as the stones and dirt which now cover our 
streets and roads ? 

How vain, then, is it to expect that wealth can ever be created 
without labor, which is its natural and necessary price ! Gold is 
now so precious precisely because so much labor is required to ob- 
tain it. "What a pity it is that the old alchemists, many of whom 
were the most learned men of their times, and who wasted fortune 
and life in their vain pursuit, could not have foreseen that the phi- 
losopher's stone, when discovered, would be as worthless as another 
stone, which should have the property of turning everything it 
touched into granite ! 

The useful metals, generally, possess value just in proportion to 
the fewness and unproductiveness of the mines whence they are 
obtained, and to the labor required for bringing them to market 
and giving them the forms and qualities that fit them for use. 
Iron in this country owes nearly aU its value to the labor expended 
in extracting it from the ore and manufacturing it ; for iron ore is 
so plentiful that, except in a few favorable localities, where fuel is 



THE NATUKE OF EXCHANGEABLE VALUE. 29 

abundant and transportation easy, an acre of ground with iron ore 
for its surface is worth hardly as much as the same extent of fertile 
land. Yet fine steel cutlery and watch-springs, which are only 
iron in a highly finished state, sell at a high price by the ounce. 
Copper, again, being more rare, and the mines of it less produc- 
tive, owes its value chiefly to its scarcity, or the labor required for 
finding it and bringing it from a distance. Yet it is so natural an 
illusion to believe that the high value of these metals in their 
manufactured state attaches to them also when they are in the ore, 
that a mining mania is more easily excited in the community than 
any other speculative bubble. 

What I have called the paradox of political economy, like the 
hydrostatic paradox, is really very simple, and admits of an easy 
explanation. In proportion as the labor required for obtaining any 
useful article is diminished, and the article itself consequently be- 
comes very common, in that proportion it approximates the charac- 
ter of those invaluable gifts of Providence, the air, the water, and 
the sunlight, which, because they are common and inexhaustible, 
have natural, but no exchangeable, value. They become natural 
wealth, they cease to be artificial tvealth. Man does not, in the 
economical sense, value them, or consider them as wealth, because 
he is not able to exchange them for those things which can be pro- 
cured only by labor ; or, in other words, he cannot purchase labor 
with them. The possession of them conveys no distinction, does 
not exalt one above his fellows, gives no power over other men. 
Each of them satisfies one imperative want, and in this respect is 
truly ^valuable ; but it does not possess that quality which is 
characteristic of all articles that are usually considered as wealth ; 
— any one of these may be bartered for more or less of any arti- 
cle or product whatsoever that the possessor may desire. We are 
wont to consider money as the universal medium of exchange, 
though it is only a contrivance for facilitating it : this is a conse- 
quence of the popular delusion which confounds money with wealth. 
Any portion of wealth, any article of value, is, like Fortunatus's 
wishing-cap, a means of obtaining, to the eoctent of its exchangeable 
value, whatever other article we may desire ; the contrivance of 
money rendering the process of obtaining it by exchange a very 
simple one. This Protean character of wealth, this capability of 
satisfying whatever want or whim the heart of man can conceive, 



30 THE PRODUCTION OF WEALTH : 

is, like the ductility of gold, its most peculiar and attractive 
quality. 

And here we perceive the explanation of the fact which has so 
often been a topic of complaint, that the pecuniary wages or earn- 
ings of scientific and literary men are, with a few rare exceptions, 
very inconsiderable. The inadequacy of the pecuniary compensa- 
tion of these persons " arises from a variety of causes ; but princi- 
pally, perhaps, from the indestructibility, if we may so term it, 
and rapid circulation of their works and inventions. The cloth 
of the manufacturer and the corn of the agriculturist are speedily 
consumed, and there is therefore a continual demand for fresh sup- 
plies of the same articles. Such, however, is not the case with 
new inventions, new theories, or new literary works. They may 
be universally made use of, but they cannot be consumed. The 
moment that the invention of logarithms, the mode of spinning 
by rollers, and the discovery of the cow-pox had been published, 
they were rendered imperishable, and every one was in a condition 
to profit by them. It was no longer necessary to resort to their 
authors. The results of their researches had become public prop- 
erty, had conferred new powers on every individual, and might be 
applied by any one." As they can no longer be appropriated, the 
difficultp of attainment, which is a necessary element of artificial 
wealth, is entirely removed ; they therefore cease to possess ex- 
changeable value, and become a part of what we have called the 
natural wealth of mankind. 

Observe, moreover, that it is in the highest departments of lit- 
erature and science that labor is most imperfectly remunerated ; in 
those of a lower rank, in adapting to popular comprehension and 
purposes of practical utility the ideas and discoveries of others, 
tact and industry may often reap a considerable pecuniary reward. 
Hence, invention is usually more profitable than discovery ; a new 
machine may create a fortune for its inventor, whilst the discoverer 
of those abstract principles of science, or general laws of nature, 
which are applied in the mechanical improvement, or are presup- 
posed in the construction of it, can obtain no compensation but 
the fame of his labors and the gratitude of posterity. No one 
thinks of rewarding the heirs of Franklin and CErsted for those 
discoveries in electricity and electro-magnetism to which we are 
primarily indebted for the lightning-rod, the electrotype, and the 



THE NATURE OF EXCHANGEABLE VALUE. 31 

magnetic telegraph. Ideas cannot be patented, or exclusively ap- 
propriated ; but machines may be. So also in autliorship, as Mc- 
Culloch observes, " though a work should have the greatest influ- 
ence over the legislation of the country or the state of the arts, it 
may redound but little to the advantage of the author. Many a 
middling novel has produced more money than the ' Principia ' or 
the ' Wealth of Nations ' ; and in this respect the ' DecHne and 
Fall of the Roman Empire ' has been far inferior to the ' Arabian 
Nights.' " " Learning hath gained most," says old Thomas Fuller, 
" by those books by which the printer has lost." 

The conversion of artificial into natural wealth — a considerable 
loss in exchangeable value being a real gain to the whole community 
— may be further illustrated by an example borrowed from Mr. 
Senior. " If the climate of England could be suddenly changed to 
that of Bogota, and the warmth, which we extract imperfectly and 
expensively from fuel, were supplied by the sun, fuel would cease 
to be useful, except as one of the productive instruments employed 
by art ; [that is, in metallurgy, driving steam-engines, etc.] We 
should )\'ant no more grates or chimney-pieces in our sitting-rooms. 
What had previously been a considerable amount of property in 
the fixtures of houses, in stock in trade, and materials, would be- 
come valueless. Coals would sink in price ; the most expensive 
mines would be abandoned ; those which were retained would 
afford smaller rents. All would gain in enjoyment by being able 
to devote to other purposes the money which they previously paid 
for artificial warmth. Still, for a time, there would be less [arfifi- 
ciat\ wealth ; [and there would be permanently a gi'eat gain in 
natural ivealth.] The capital and the labor previously devoted to 
warming our apartments would be diverted to the production of 
new commodities. The cheapness of coal would increase the sup- 
ply of manufactured articles, and there would then be as much 
wealth as there was before the change, — probably more, and cer- 
tainly much more enjoyment." 

As to the nature of the labor which ends in the production of 
wealth, it is justly remarked by McCulloch, that " all the opera- 
tions of nature and art are reducible to, and really consist of, 
transmutations, — that is, of changes of form and of place. By 
production, in this science, is not meant the production of matter, 
that being the exclusive attribute of Omnipotence, but the pro- 



32 THE PKODUCTION OF WEALTH. 

duction of utility, and consequently of value, by appropriating and 
modifying matter already in existence, so as to fit it to satisfy 
our wants and contribute to our enjoyments. The labor which ia 
thus employed is the only source of wealth. Nature spontaneous- 
ly furnishes the matter of which all commodities are made ; but 
until labor has been applied to appropriate that matter, or to 
adapt it to our use, it is wholly destitute of value, and is not, nor 
ever has been, considered as forming wealth. Place us on the 
banks of a river, or in an orchard, and we shall infallibly perish of 
thirst or hunger, if we do not, by an effort of industry, raise the 
water to our lips, or pluck the fruit from its parent tree. It is sel- 
dom, however, that the mere appropriation of matter is sufficient. 
In the vast majority of cases, labor is required not only to appro- 
priate it, but also to convey it from place to place, and to give it 
that peculiar shape without which it may be totally useless, and 
incapable of ministering either to our necessities or our comforts. 
Of the innumerable variety of animal, vegetable, and mineral pro- 
ducts, which form the materials of food and clothes, none was 
originally serviceable, while many were extremely noxious to man. 
It is his labor which has given them utility, that has subdued 
their bad qualities, and made them satisfy his wants and minister 
to his comforts and enjoyments." 

We distinguish three kinds of industry : — 

1. The labor of collecting and appropriating natural products. 
This includes the work not only of the agriculturist, but of the 
miner, the huntsman, the fisherman, and all others who bring to- 
gether for the use of man the various products of sea and land 
which satisfy his wants, 

2. The tasks of the manufacturer, the mechanic, and the arti- 
san, who shape, combine, and fabricate raw materials into forms fit 
for use, 

3. The business of the merchant, who brings together the pro- 
ducts of various climes, distributes them among the people in pro- 
portion to their means and wants, and equalizes the supplies and 
prices of commodities by storing them up for future use, or carry- 
ing them where they are most needed. 

Again, the commodities which constitute wealth may be divided 
into two classes : — 1. The articles which are designed for imme 
diate consumption, and which directly satisfy the wants of man; 



THE MEASURE OF VALUE. 33 

such as food and clothing that are fit to be eaten and worn, the 
houses that shelter us, and the ornaments and luxm-ies that gratify 
oiu- tastes. These may be said to have Primary value. 2. The 
tools, implements, and raw materials, by means of which, or out 
of which, the former articles are made, but which, in their present 
shape, are not fitted for our immediate gratification or support. 
These last possess only a kind of Secondary or derivative value, as 
they are prized, not for their own sake, but for what can be made 
out of them, or obtained by their aid. 

Thus far it has been shown, that labor is not only necessary in 
fact for the creation of value, but enters into the very idea of it, 
so that, when the necessity for labor departs, the reality and even 
the conception of value vanish along with it. I now say that the 
labor required is a measure of the value produced. But here the 
word labor must be taken in its most comprehensive signification, 
I mean by it any human exertion whatever, corporeal or intellectual, 
which, directly or indirectly, overcomes or diminishes that difficulty 
of attainment which we have seen to he an essential element of wealth. 
The only measure of such labor is its comparative efficiency. 
Thus, the labor of one practised and skilful artisan is equal to 
that of at least thi-ee raw hands, or ordinary laborers, as they are 
termed ; in some cases it may equal that of many more. The 
labor, chiefly intellectual, of general superintendence and skilful 
direction of the operatives employed in a manufactory may be 
measured by the ordinary labor which it saves, — that is, by the 
number of additional workmen, or the additional time, that would 
be needed if such superintendence were wanting ; or it may be 
measured by the scarcity of the peculiar skill and tact which are 
required for such superintendence, — that is, by the difficulty of 
finding a competent superintendent. 

So the value of a machine may be either the labor which it 
saves, or the labor which it costs. If, for instance, a manufacturer 
introduces a new machine, by the aid of which two men can do 
the work that formerly required ten men, (two more persons being 
required to build the machine and keep it in repair,) he will save 
the labor of six persons ; and the value of this machine to him 
will be represented by six laborers working gratuitously. This 
will be the case, however, only so long as he can keep the machine 

3 



34 THE MEASURE OF VALUE: 

a secret from other manufacturers, or enjoy the exclusive use of it. 
When its use becomes general, the general saving of labor, by re- 
ducing the cost of the manufactured article, will also reduce its 
price; for that which costs the labor of but four persons will ex- 
change for the labor of not more than four. No one will give any- 
thing more for any commodity than it would cost him to produce 
it for himself ; and in the case supposed, any four workmen, by 
employing such a machine, might manufacture the article for 
themselves. Now then, the value of the machine will be only 
the labor which it costs ; the articles produced by it will represent 
the labor of but four persons, — two to work it, and two more to 
build and keep it in repair. 

The general law, therefore, that the labor required is a measure 
of the value produced, is subject to two limitations : the first is, 
that allowance must be made for the various degrees of efficiency 
of the several laborers employed ; the second, that the maker has 
not the advantage of a patented machine or a secret process, which 
might enable him to produce the commodity by a smaller expendi- 
ture of labor than is usual. According to Adam Smith, a work- 
man accustomed to the use of the hammer, but not accustomed to 
making nails, cannot manufacture usually more than 300 nails in a 
day ; while such is the dexterity acquired by practice, that about 
2,300 can be made in a day by a workman who has never exercised 
any other trade than that of making nails. The value of one 
day's labor of such a workman, in this manufacture, will be evi- 
dently equal to that of seven or eight days' labor by an ordinary 
smith. It is equally obvious, that the exclusive use of a machine, 
or a secret process, might render the articles produced by three 
ordinary workmen the full equivalent in value of those manufac- 
tured by thirty or forty hands working without any such advantage. 

When the use of machinery has diminished the exchangeable 
value of certain commodities, the question may be asked. What 
has become of the difference between their former and their 
present cost] The difficulty of obtaining these commodities is 
diminished, the labor required to overcome that difficulty is con- 
sequently lessened, and therefore, according to the principles al- 
ready laid down, less exchangeable value is created. Suppose 
cloth to be the commodity manufactured, and that the price was 
formerly ten cents a yard, while it can now be had for four cents. 



THE DISTRIBUTION OF WEALTH. 35 

All of that cloth which is already in the market will now bo held 
at only two fifths of its former value. What has become of the 
other three fifths'? Is this amount of exchangeable value de- 
stroj^ed, and is the introduction of labor-saving machinery, there- 
fore, an evil to the community 1 

The answer is, in this case as in the former one, that the ex- 
changeable value of the conmiodity is diminished ; but what is 
taken away from that value is added to what I have called the 
natural wealth of the people, in distinction from their ai'tificial 
wealth, — to the stock of those things, like the air and the sun- 
light, which are of pre-eminent utility, but, being universal and in- 
exhaustible, cannot be exchanged for anything. That this is true 
may be scon at once by putting the extreme case. Imagine that 
the machine, instead of saving only three fifths of the labor, 
should save the whole of it ; imagine that some contrivance 
should be hit upon for producing cloth in unbounded jDrofusion, 
no labor of man being required in any part of the process. It is 
obvious that we should then obtain cloth on the same easy terms 
on which we now obtain air and light. It would be an addition 
to the natural wealth of mankind ; but as any person could have as 
much of it as he wished, without difficulty, he would not give in 
exchange for it anything which had cost him labor : it would 
have no exchangeable value. And as a machine which would 
save the whole of the labor would transform the whole exchangeable 
value into natural wealth, so, if it saved but three fifths of the 
labor, it would add that three fifths to our natural wealth. 

Observe, however, as before, that this result would follow only 
if the use of the machine became common. If its inventor or 
first introducer could keep it to himself for a time, he could ex- 
change the cloth which cost him the labor of only four men for 
aiticles which cost others, and would cost him, the labor of ten 
men ; because it would take ten persons, without the aid of the 
machine, to produce the cloth. The valjie produced is measured 
by the averar/e of the labor required for making or obtaining the 
commodity, and not by the greater or smaller amount of labor 
which circumstances might render necessary in a particular case. 
If any person has a monopoly granted by the government, or a 
secret process, or a machine which others cannot imitate, he can 
turn to his own exclusive advantage the value which would other- 
wise be added to the natural wealth of the community. 



36 THE MEASUKE OF VALUE: 

Accident, or good fortune as it is called, may have the same 
effect as a monopoly or a secret process. Take the pearl-fishery, 
for instance. The value of the pearls obtained will be determined 
by dividing the whole amount procured in one day by the whole 
number of divers employed during that day ; and by dividing the 
quantity obtained in the whole season by the number of days in 
that season ; — thus ascertaining the average cost of the pearls in 
labor. But the business is a mere lottery : one diver may bring 
up, from his first plunge, a pearl worth a hundred dollars ; 
another may dive for a week, and obtain little or nothing. If a 
capitalist should undertake the business, and pay fixed wages to 
all the divers on condition of receiving all the pearls which they 
found, his profits, or the value of the pearls, would evidently be 
determined by their average cost in labor, and not by individual 
and extraordinary cases. When Mr. Senior, who denies that 
labor is essential to the creation of wealth, asks triumphantly, 
" If, while carelessly lounging along the sea-shore, I were to pick 
up a pearl, would it have no value ? " and, " Supposing that aero- 
lites consisted of gold, would they have no value ? " he might be 
answered, that accidents and miraculous events are supposed to 
be eliminated when we are reasoning upon the general principles 
which govern ordinary events; and that, if pearls were common 
enough to be often found by loungers on the sea-shore, or if 
showers of golden aerolites were so frequent as no longer to ap- 
pear miraculous, certainly both the pearls and the gold would 
have little or no value. 

I have dwelt at length upon the two fundamental maxims of 
Political Economy, that labor is the source of wealth, and that 
the wealth produced is in exact proportion to the labor expended, 
and is therefore measured by it ; because, obvious and unquestion- 
able as these truths may appear, they are yet such as the world is 
slow to recog-nize and reluctant to act upon. Here in America, 
especially, too many people spend their time and waste their sub- 
stance upon vain projects for getting rich without labor. They 
hope that some one of those accidents, or pecidiar circumstances, 
which we have noticed as occasionally disturbing the regular pro- 
portion of value to labor, may fall to their lot : that is, — for it 
amounts to nothing else, — that they may become rich at the ex- 
pense of their fellows ; that they may, by some invention, or per- 



THE DISTKIBUTION OF WEALTH. 37 

haps some roguery, be able to exchange four days' labor for ten 
days' labor. They will take shares in a copper-mine, or go to 
California to dig gold, or commit any other exti-avagance, though 
it should be demonstrated to them that the average return, the 
whole profit divided by the whole number of adventurers, would 
not keep one from starvation. 

Take another instance. Three persons out of four, when the 
temptation is brought home to them, will buy a ticket in a lottery ; 
though this is the only adventure ever offered to the public, in 
which, avowedlt/, the net result is not a gain, but a loss. For 
$ 120,000 received as the price of tickets, perhaps $ 100,000 are 
returned in prizes ; that is, the adventurers expect that only five 
sixths of what they have invested will be returned to them, in- 
stead of getting back the whole and a profit besides. And the 
$ 100,000 returned are divided into so few prizes that nineteen 
out of twenty of the ticket-holders must suffer a total loss of 
their investment. But one fortunate person — one out of 60,000 
— must receive $ 20,000 for two invested. And yet lotteries are 
so popular that they must be forbidden by law, in order to pre- 
vent clerks from robbing their employers for the sake of investing 
money in them. 

Coming back to the subject of the co-operation and the compen- 
sation of labor, it may be remarked, that the seemingly complex 
and difficult process of dividing the ultimate value of the finished 
article equitably among all those who have had a share in its pro- 
duction, is really accomplished with ease, through the number of 
exchanges it undergoes at the different stages of its manufixcture. 
At each stage, labor effects a change in its form, bringing it nearer 
to the state in which it is fitted for consumption ; at each ex- 
change, therefore, it has more labor vested in it, and consequently 
buys more labor vested in other products, the diflference being the 
compensation of the last person who has made an alteration of its 
form. 

What regulates this difference, and causes each producer to be 
paid in exact proportion to the labor which he has bestowed, is 
the competition of other producers. Wheat, for instance, is first 
Bold or exchanged as wheat, the price paid for it being the compen- 
sation of the farmer by whose care and labor it was raised. As 
labor is the measure of value, a quantity of wheat which repre- 



38 THE MEASUEE OF VALUE : 

sents five days' labor must be exchangeable for a quantity of cloth 
which also represents five days' labor, — no more and no less ; — 
no more, because this would induce the cloth-maker to turn farmer 3 
no less, because the farmer would then turn cloth-maker. No man 
will give six days' labor in any one product for another product 
which he might himself raise in five days. 

It may be said, that he who has long practised a particular trade 
or art will be reluctant to exchange it for another, as he would 
thereby sacrifice the skill which he has obtained by experience, and 
be obliged to serve another apprenticeship to a new handicraft or 
profession. But it must be remembered, that employments can be 
kept full only by a succession of young and fresh hands constantly 
entering them ; and these persons will choose, of coiirse, the occu- 
pation that is most profitable. Thus the number of those who 
pursue the art which is underpaid will rapidly diminish, while the 
number in the more profitable branches of industry will increase, 
until an equality of gains among all these branches is re-estab- 
lished. 

Exchanges then regulate themselves, and must be made on 
equal terms. The farmer having received a fair compensation for 
his work, the miller next obtains the wheat, and, having converted 
it into flour, sells it to the flour-merchant at an advanced price, 
because more labor is now vested in it. In like manner, it passes 
successively into the hands of the retail dealer, the baker, and the 
consumer, at each stage acquiring an additional vahie in exchange 
just sufficient to compensate, on an average, the labor expended 
upon it at that stage. 

Competition, then, when it is free, or competition modified by 
custom, determines the distribution of the value of a product 
among those who have concurred in its production. How far it 
may be modified by custom depends on circumstances. Mr. Mill 
justly observes, that competition has become '* the governing 
principle of contracts only at a comparatively modern period"; 
and that " the relations, more especially, between the land-owner 
and the cultivator, and the payments made by the latter to the 
former, are, in all stages of society but the most modern, deter- 
mined by the usage of the country." It was thus that, in many 
European countries, the serfs were gradually elevated, first into 
the condition of free tenants, and finally of absolute owners of the 



THE DISTRIBUTION OF WEALTH. 39 

soil. Their original obligation, to furnish to their lords an indefi- 
nite amount of provisions and labor, was first transformed into a 
definite payment of a fixed amount of either ; these payments in 
kind were next commuted for payments in money, which were 
established by custom at so early a period, and therefore at so 
small an amount, that they became mere quit-rents ; and the land 
was finally ransomed even from these quit-i-ents by commutation 
on reasonable terms, so that the former serfs became absolute pro- 
prietors of the ground. 

While the peasantry in most countries of Continental Eiu-ope were 
thus not only emancipated, but secured from want by the owner- 
ship of the ground which they formerly tilled as slaves, the agri- 
cultural laborers of England were far less fortunate. All landed 
property in England was equally of feudal origin ; that is, the 
land was admitted to belong originally to the state ; and the im- 
mediate vassals of the crown, or the tenants in capite, held it only 
on condition of rendering certain services and payments, that 
might be considered as rent. Just so, the practice of sub-infeuda- 
tion being introduced, these vassals of the crown parcelled out 
their respective lands to a set of inferior tenants, many of whom 
were originally serfs, — on condition, first, of certain services and 
supplies being rendered ; next, of a definite payment in kind ; and 
then, of an ordinary money rent. Thus the inferior tenantry 
were the vassals of the great landholder, in the same manner, and 
upon the same terms, upon which the latter was a vassal of the 
crown, both being still called tenants in the language of the law. 
As the prerogatives of the crown were gi-adually diminished, and 
the liberties of the people increased, the nobility and landed gen- 
try, the original tenants in chief, gi-adually lessened the feudal 
burdens upon their land, which consisted in services and payments, 
and finally, in Charles the Second's time, shook oflf the remnant 
of them altogether, artfully exchanging what had become a mere 
land-tax for an excise on beer and ale. Thus they became abso- 
lute owners of their holdings or tenements. But they had no dis- 
position to make the same concessions to their own tenantry, which 
they had themselves exacted from the crown. The English peas- 
antry have not been able to retain their lands, even on condition 
of paying the full original rent for them. They have subsided 
into the class of tenants at will, ground down by rack-rents for a 



40 THE MEASUEE OF VALUE : 

century or two, and at last expelled from the land altogether, to 
find their subsistence where they may. The feudal dues from the 
lands of the tenants in chief were slowly transformed into a 
species of land-tax, and at last abrogated entirely ; while the same 
dues from the lands of the inferior tenantry were transformed into 
annual rents, augmented in amount by every increase in the value 
of the land ; and when the peasants, from misfortune or bad man- 
agement, could no longer pay them, they were ejected from the es- 
tate altogether, and became mere laborers for wages, or paupers. 
, The effect of custom in modifying competition has also been seen 
in Ireland, where the custoei of what is called tenant-right has 
sprung up, prevailing almost universally in the north, and grad- 
ually extending itself into the centre and west of that unhappy 
country. " My view of tenant-right," says Mr. Senior, " is, that 
it is the difference between the rent actually charged by the land- 
lord according to the custom of the country [which is a sort of 
quit-rent], and the utmost competition value [which is rack-rent^. 
In some cases, it is said to be founded on improvements made by 
the tenant on his farm, the beneficial effects of which are not ex- 
hausted, so that the outgoing tenant claims a right to sell them. 
The landlords, most of whom are absentees, and therefore unable 
to watch and know the changes which time produces on the an- 
nual value of their estates, have so long received an unvarying 
sum as the rent of each farm, and each farm has remained so long 
in the possession of one tenant, that the customary rent, or quit- 
rent, is now considered as all which the landlord is entitled to re- 
ceive; and whatever the land is really worth beyond this sum 
accrues to the benefit of the tenant. If this tenant wishes to 
quit the holding, custom gives him the right to sell what we should 
call "the good-will of the farm " for his own benefit; that is, the 
incoming tenant pays his predecessor a handsome bonus for the 
privilege of taking the farm on the old fixed rent, which is now 
much below the annual value of the ground. An enterprising 
landlord sometimes buys up this " right " for himself, in order 
that he may once again enter into fuU possession of his property. 

Custom is here seen modifying the full effect of competition on 
the price of land, because the farm is not actually let to the high- 
est bidder ; and it often has equal influence on the prices of other 
commodities. Among the publishers of books, for example, the 



THE DISTRIBUTION OF WEALTH. 41 

courtesy of the trade, as it is termed, often restrains one house 
from issuing a rival edition of a work unprotected hj copyright be- 
fore the edition pubUshed by another, who first risked the enterprise, 
is exhausted. So, also, as Mr. Mill remarks, "all professional re- 
muneration is regulated by custom. The fees of physicians, sur- 
geons, and hamsters, the charges of attorneys, are nearly invariable. 
Not certainly for want of abundant competition in those profes- 
sions ; but because the competition operates by diminishing each 
competitor's chance of fees, not by lowering the fees themselves." 

But competition is the general rule ; and the effect of unre- 
strained competition is to distribute the value of a product equally 
among its various producers, leaving neither to any of them, nor 
to the consumer, anv just ground of complaint. Each receives in 
exact proportion to the labor which he has bestowed; the labor of 
all was equally necessary to present the article in its finished 
state ; and he who finally consumes it, therefore, justly pays all by 
rendering an equivalent amount of labor. Monopolies and scarcity- 
values exist only when competition is ban-ed out by a 'patented 
invention or a se<;ret process, and occasion a temporary enhance- 
ment of price and inequality of distribution. But these excep- 
tions, in modern times, are of limited duration and moderate 
amount. The patent soon expires, the secret process soon becomes 
known, and equality of distribution is then restored. 

I place stress vipon this point, because the eifect of sharp compe- 
tition is, in some measure, to blind our ej'es to the fact, that we 
are indebted to the friendly co-operation of labor for all the neces- 
saries, all the comforts, all the luxuries, which we enjoy. This 
co-operation and mutiial dependence of all the arts and trades, all 
the branches of industry, all ranks and professions, is one of the 
most valuable lessons of Political Economy ; and the fair rivalry 
which causes the distribution of values among them, in proportion 
to their respective industry and skill, ought not to create feelings 
of mutual jealousy and dislike, — ought not to give rise to the 
cry that one class is taking more than its due share of the com- 
mon product. It is impossible that any class, as a class, should 
be undxily favored. Individual cases there may be, where fortune, 
or singiUarly propitious circumstances, may swell one's gains be- 
yond the common standard. But as a general rule, competition, 
if unfettered, must tend to reduce them to an equality. The 



42 THE MEASUEE OF VALUE : 

manufacturer is no more dependent upon the agriculturist than 
the agriculturist is upon the manufactiu-er. The merchant is 
equally dependent upon both, and both depend equally upon hira. 
Even the common laborer is as much indebted to his employer as 
his employer is to him ; each rendering a peculiar service, without 
■which the finished product coixld not be placed in the market or 
exchanged for other products. . 

The prejudice which prevents this truth from being generally 
recognized is the very natural one, which considers the value of 
the finished product to reside chiefly in the raw material, and, 
when that is bulky and cheap, to believe that the great enhance- 
ment of its price, which takes place as it passes through the hands 
of the manufacturer and merchant, is a needless and arbitrary 
thing, an injury both to the farmer and the consumer. But it is 
not so : in either case, a modification of the article is eifected, and 
the difficulty which the consumer finds in obtaining it in a form 
fit for use is lessened ; and it is easy to show that all the modifi- 
cations which it successively undergoes conduce to that end. We 
cannot consume or use raw cotton, corn in the husk, or unground 
wheat. The transformations effected by art are as necessary pre- 
liminaries to use, and therefore produce wealth just as much, as 
the transformations effected by nature. 

" The industry which prepares," says Torrens, " is, necessarily, 
in the order of time, secondary to that which appropriates the 
gifts of nature. But though man must originally have lived by 
merely availing himself of nature's spontaneous gifts, yet the very 
first, or, at most, the very second step towards knowledge and im- 
provement, must have led him to the attempt of superadding to 
these gifts some rude species of preparation. Almost the whole 
of the productions of nature are presented to us in a new or rude 
state, and, if it were not for the application of labor to the pre- 
paring and forming of them, would be absolutely without utility. 
Without manufacturing or adaptive industry, therefore, our wealth 
would be necessarily limited to that scanty supply of necessaries 
which nature presents in a state fit for immediate consumption. 
Man would be reduced to a more destitute and helpless state than 
that in which he has ever yet been found, even in the most bar- 
barous and savage countries." 

Commerce, moreover, as a source of wealth, is equally produc- 



THE DISTRIBUTION OF WEALTH. 43 

tive -with manufacturing and appropriative industry. The most pre- 
cious fruits of the earth cease to constitute wealth when there is a 
superabundance of them, and when they no longer find wants to 
satisfy. Commerce comes to restore utility to them, to I'eplace 
them among the articles of wealth, by transporting them to places 
where they are wanted. Of what avail is it for me to know, that 
there is tea enough in China, and coffee enough in the West Indies, 
— that there is cotton to spare in Carolina, and a surplus of wheat 
in Ohio, if some kind person will not intervene to bring these articles 
to my doors, and offer to me the precise quantity of each which I 
need, in exchange for other articles, of which I may have a super- 
abundance 1 To accomplish this transportation and distribution, — 
each individual being accommodated with what he wants, as much 
as he wants, and where he wants it, — a large apparatus of means 
is necessary. Ships must be built and appointed, warehouses must 
be stocked, correspondence must be arranged, and the supplies must 
be nicely adapted to the wants and means of each locality which 
is to be provided for. " Roads, railways, canals, post-offices, mints, 
exchanges, banks, horses, can'iages, the professions of bankers, 
merchants, brokers, factors, carriers, merchant-seamen, and many 
more, may be regarded as parts of the immense, complicated, and 
most costly apparatus of exchange." The problem already men- 
tioned, that of supplying a large city with all its necessaries and 
comforts, must be solved in every part, — in all its complex details. 
Commerce is what renders po-ssible that vast division of labor, to 
which the industry of civilized man owes nearly all its superior 
efficiency over that of the savage. He who devotes a lifetime to 
the manufacture of one small article — needles, for instance — 
must accumulate an immense store of them ; and the quantity 
needed by any one family is so small that, if he would find pur- 
chasers for his whole stock, without the help of professed traders, 
he must give two thirds of his time to seeking purchasers of what 
he manufactui-es in the other third. The merchant takes up his 
whole stock at once, giving him its full value in whatever he 
most needs in return. It is a mere truism to say, that whoever 
converts an idle and superfluous thing into a highly useful one 
creates wealth. The merchant does this, by making one man's, or 
one country's, superfluity supply another's wants ; he does it by 
exchanging superfluities, and thus equalizing the bounties of Prov- 



44 THE MEASURE OF VALUE. 

idence. By his instrumentality, the hard and rugged soil of Mas- 
sachusetts, with its long winter, yields to its industrious cultivator 
all the fruits of the tropics, all the productions of the most favored 
climes. 

The merchant eqnalizes the gifts of nature in another manner, 
— by transportation in time, as well as in space. The surplus 
from an unusually abundant harvest he stores up in reserve 
against the possible deficiency of the next season. He gives the 
alarm, when there is the slightest reason to fear that the next 
crop may be a failure, by raising the price of the stock already on 
hand, and thus renders the people economical in its consumption. 
Through all these methods, his agency in the production of wealth 
is so important that he richly earns the portion of it which falls 
to his lot in the general distribution of values. 

There is a common opinion, that the mere exchange of one ar- 
ticle for another cannot create any additional value, and hence, 
that whatever may be gained by one party to the transaction must 
necessarily be lost by the other. Bat it is not so : Mr, Babbage 
has clearly illustrated the truth that 60^/4 parties may be equally 
profited by the mere interchange of their commodities. 

" It is found by experience," he says, " that the upper leather 
of boots made in France is better and more durable than the upper 
leather manufactured in England. On the other hand, it is found 
that the leather prepared in England for the soles of boots is less 
permeable by water, and more durable, than that made in France. 
Let us suppose that, in each country, a pair of boots will endure 
twelve months' continual wear, after which time they are thrown 
aside. In England, the destruction of the boots will arise from 
that of the upper leather ; whilst in France, it will be caused by 
that of the sole. Let us also suppose that the upper leather of 
France will wear three months longer than the French soles, and, 
reciprocally, that the soles of England will wear three months 
longer than the English upper leather. Under these circumstan- 
ces, it is clear that, if the inhabitants of each country insist on 
making their boots entirely with the produce of their own tanner- 
ies, the average duration of a pair of boots, both in France and 
England, will be twelve mouths. Let us assume, for the sake of 
simplicity, that in each country the upper leather and the soles 
have the same value. Then it is equally clear, if England were 



THE DIVISION OF LABOE. 45 

to give to France a million pair of soles in exchange for a million 
pair of French upper leathers, that one million of the inhabitants 
of each nation would find their boots last during fifteen instead of 
twelve months." 

The sum of the two commodities so exchanged evidently has a 
greater value after the exchange than before ; and the question 
may be asked, Whence has the profit arisen 1 France and England 
having both been benefited, is there any third party at whose ex- 
pense their joint profit has been acquired ] Mr. Babbage rightly 
answers, that " the advantage is most frequently won by industry 
and knowledge from nature herself The superior natural advan- 
tages of England — say, better bark, water, climate, etc. — for 
producing soles, and the superior natural advantages of France for 
producing upper leathers, instead of being confined to the natives 
of each country separately, are now, after the exchange, enjoyed 
equally by both." 



CHAPTER III. 

THE DIVISION OF LABOR : ITS BENEFICIAL AND INJURIOUS CONSE- 
QUENCES : EFFECTS OF THE INTRODUCTION OF MACHINERY. 

The analysis of the nature of value, and of the distribution of 
wealth among its producers, has already brought us to the conclu- 
sion, that the co-operation of many laborers with each other is one 
great cause of the efficiency or productiveness of labor. Labor is 
divided in two wa^^s. First, by allotting different portions of a pro- 
cess to different hands, all co-operating with each other in the pro- 
duction of one article ; as when eighteen workmen are employed 
in one pin-manufactory, each devoting himself exclusively to one 
of the eighteen distinct operations into which the making of a pin 
is divided. The second kind of division takes place by the separa- 
tion of emjiloyments, the several sets of laborers being emploj^ed at 
different times and places, and in distinct pursuits, so that their 
co-operation with each other, though real, is not so obvious as in 
the former case. These two modes of the division of labor, says 
Mr. Wakefield, may be termed Simple Co-operation and Complex 
Co-operation. The Co-operation of distinct trades, and the Co- 



46 THE DIVISION OF LABOR. 

operation of workmen in different portions of one process, tend 
equally to render labor more efficient. 

Thus, the manufacturer is just as dependent on the miner, the 
agriculturist, and the trader, as the workman who makes the head 
of a pin is on him who cuts the wire and him who sharpens it. 
The services of all are needed before all the community can obtain 
the article in its finished state ; and therefore the ultimate and 
highest value of that article, the price of it when ready for con- 
sumption, is to be divided among all who have concurred in its 
production, each receiving in proportion to the labor he has be- 
stowed. When is it " ready for consumption " 1 Not surely as 
soon as it has received the last touch of skill in the workshop, but 
only when it is offered to the person who wishes to use it, — 
offered, as it were, at his own door, in just the quantity that he 
desires, and in exchange for the only article which he is able to give 
for it. Here the intervention of the trader is needed ; a peculiar 
task is to be performed, which can be done to advantage only by 
one who devotes himself to it altogether, without complicating it 
with other employments. The wholesale dealer takes off the 
manufacturer's whole stock, sparing him the labor of finding nu- 
merous purchasers of particular quantities ; the retailers divide 
this stock, and circulate it through the length and breadth of the 
land, offering to each small villager just as little as he needs, and 
receiving in exchange, (sometimes through the intervention of 
money, and sometimes by direct barter,) whatever product the. vil- 
lager has to offer. The importance of the service thus rendered 
appears from the large portion of the ultimate value of the fin- 
ished product which falls to their share ; the profits of retailers in 
this country average from 10 to 20 per cent., or from one tenth to 
one fifth part of the values sold. And while competition is free, 
it is certain, for the reasons already explained, that this is only 
a fair compensation for their services ; if it were not so, miners, 
manufacturers, and even common workmen, would turn retailers, 
and undersell them. 

I borrow another illustration from Mr. Mill. " In the pi-esent 
state of society, the breeding and feeding of sheep is the occupa- 
tion of one set of people, dressing the wool to prepare it for the 
epinner is that of another, spinning it into thread of a third, 
weaving the thread into broadcloth of a fourth, dyeing the cloth 



THE DIVISION OF LABOR. 47 

of a fifth, making it into a coat of a sixth, without counting the 
multitude of carriers, merchants, factors, and retailers put in re- 
quisition at the successive stages of this process. All these per- 
sons, without knowledge of one another or previous understand- 
ing, co-operate in the production of the ultimate result, a coat. 
But these are far from being all who co-operate in it ; for each of 
these persons requires food and many other articles of consump- 
tion ; and unless he could have relied that other people would pro- 
duce these for him, he could not have devoted his whole time to 
one step in the succession of operations which produce one single 
commodity, a coat. Every person who took part in producing 
food, or erecting houses, for this series of pi'oducers has, however 
unconsciously on his part, combined his labor with theirs." 

The advantages of Simple Co-operation, which was formerly re- 
garded as the only kind of Division of Labor, have been admi- 
rably illustrated by Adam Smith. An example of the effects 
produced by the Division of Labor may be taken from a very hum- 
ble branch of industry, the manufacture of playing-cards. " It is* 
said by those engaged in the business, that each card, before being 
ready for sale, undergoes no less than seventy operations, every 
one of which might be the occupation of a distinct class of work- 
men. And if there are not seventy classes of work-people in each 
card-manufactory, it is because the Division of Labor is not carried so 
far as it might be ; because the same workman is charged with two, 
three, or four distinct operations. The influence of this distribu- 
tion of employments is immense. I have seen a card-manufactory 
where thirty workmen produced daily 15,500 cards, being about 500 
cards for each laborer ; and it may be presumed that, if each of 
these workmen were obliged to perform all the operations himself, 
even supposing him a practised hand, he would not perhaps com- 
plete two cards in a day ; and the thirty workmen, instead of 
15,500 cards, would make only 60." 

The business of watch-making in England is said by Mr. Bab- 
bage to have been divided into 102 distinct branches, to each of 
which a boy may be put apprentice, and taught to practise it ex- 
clusively, without learning to work at any other branch. " The 
watch-finisher, whose business it is to put together the scattered 
parts, is the only one, out of 102 persons, who can work at any 
other department than his own." 



48 THE DIVISION OF LABOK, 

The prodigious increase in the efficiency of labor, caused by 
division of the task, is attributed by Adam Smith to three causes. 

1. The increased dexterity, corporeal and intellectual, acquired 
by frequent repetition of one simple operation. The laborer thus 
acquires a sleight of hand, enabling him to perform his task with 
a rapidity which, to those who have had no experience in the 
work, appears truly marvellous. A child who fastens on the 
heads of pins will repeat an operation requiring several distinct 
motions of the muscles one hundred times a minute, for several 
successive hours. Gymnastic exercises, many feats of jugglery, 
and the ease and brilliancy of execution acquired by experienced 
performers on musical instruments, are other cases, as remarkable 
as they are familiar, of the rapidity and facility acquired by repeti- 
tion. The same is true of operations exclusively mental ; a prac- 
tised accountant sums up a column of figures with a quickness 
that resembles intuition. 

2. The saving of the time which is commonly lost in passing 
from one species of work to another, and in the change of place, 
position, and tools. Thus, says Smith, " a country weaver who 
cultivates a small farm must lose a good deal of time in passing 
from his loom to the field, and from the field to his loom. When 
the two trades can be carried on in the same workhouse, the loss 
of time is, no doubt, much less. Even in this case, however, it is 
very considerable. A man commonly saunters a little in turning 
his hand from one employment to another." " When the human 
hand, or the human head," adds Mr. Babbage, " has been for some 
time occupied in any kind of work, it cannot instantly change its 
employment with full effect. The muscles of the limbs ernplo3^ed 
have acquired a flexibility during their exertion, and those not in 
action a stiffness during rest, which renders every change slow and 
unequal in the commencement. Long habit produces also in the 
muscles exercised a capacity for enduring fatigue to a much greater 
degree than they could support under other circumstances." So, 
also, in the use of tools, time is lost in shifting from one to 
another ; and when many implements are required for the different 
occupations, at least three fourths of them must be constantly 
idle and useless. " A certain quantity of material will in all cases 
be consumed unprofitably, or spoiled, by every person who learns 
an art ; and as he applies himself to each new process, he will 



THE DIVISION OF LABOR. 49 

waste some of the raw material, or of the partly manufactured 
commodity. But if each man commits this waste in acquiring 
successively every process, the quantity of waste will be much 
greater than if each person confines his attention to one process. 
And in general, each will be much sooner qualified to execute his 
one process if he be not distracted, while learning it, by the ne- 
cessity of acquiring others." 

3. The invention of a great nimiber of machines, which facili- 
tate and abridge labor in all its departments. The division of 
labor reduces a complex operation to many simple tasks, each of 
which is incessantly repeated ; and this is precisely what machines 
may be made most easily to perform. The whole of a workman's 
attention, moreover, being directed to one simple object, easier and 
readier methods of obtaining that object are more likely to occur 
to him, than when his thoughts are dissipated among a variety of 
things. I have heard that most of the improvements in machin- 
ery, which have been made of late years in the manufactories at 
Lowell, were first suggested by the common workmen who were 
engaged in tending the machines. In the first steam-engine, says 
Adam Smith, " a boy was constantly employed to open and shut 
alternately the communication between the boiler and the cylinder, 
according as the piston either ascended or descended. One of 
those boys, who loved to play with his companions, observed that, 
by tying a string from the handle of the valve which opened the 
communication to another part of the machine, the valve would 
open and shut without his assistance, and leave him at libei'ty." 
Thus, one of the most important steps in the improvement of 
steam-engines was made by an idle boy. 

4. Another advantage derived from the Division of Labor was 
first pointed out by Mr. Babbage, — the more economical distri- 
bution of labor, by classifying the work-people according to their 
capacity. " Different parts of the same series of operations re- 
quire unequal degrees of skill and bodily strength ; and those who 
have skill enough for the most difficult, or strength enovigh for the 
hardest, parts of the labor, are made much more useful by being 
employed solely in them ; the operations which everybody is capa- 
ble of, being left to those who are fit for no others." Thus, in a 
cotton manufactory, men, women, and children are employed on 
different portions of the work, and, of course, at very diff'erent 

4 



50 THE DIVISION OF LABOR. 

rates of wages. Obviously there would be a great waste if men 
were employed to perform tasks which children might do as well, 
or if fingers which are delicate enough for hem-stitching and 
embroidery were devoted to raising heavy weights or swinging 
sledge-hammers. In needle-making, the scale of remuneration for 
different parts of the process, performed by different work-people, 
varies from sixpence to twenty shillings a day. 

5. One of the principal advantages of the Division of Labor, 
says Mr. Senior, " arises from the circumstance that the same ex- 
ertions which are necessary to produce a single given result are 
often sufficient to produce many hundred or many thousand simi- 
lar results. The Post-O£&ce supplies a familiar illustration. The 
same exertions, which are necessary to send a single letter from 
Falmouth to New York, are sufficient to forward fifty, and nearly 
the same exertions will forward ten thousand. If every man were 
to effect the transmission of his own correspondence, the whole life 
of an eminent merchant might be passed in travelling, without his 
being able to deliver all the letters which the Post-Office forwards 
for him in a single evening. The labor of a few individuals, de- 
voted exclusively to the forwarding of letters, produces results 
which all the exertions of all the inhabitants of Europe could not 
effect, each person acting independently." 

The extent of the Division of Labor must always be limited by 
the extent of the market. Ten workmen can make 48,000 pins 
in a day ; but they cannot do so to advantage unless there is a 
daily consumption of pins to that amount. If there be a daily 
demand for no more than 24,000 pins, they must either lose half 
the day's work, or change their occupation, — that is, lessen the 
Division of Labor by engaging in two separate tasks. Hence, the 
Division of Labor cannot be carried to its farthest limit except in 
the case of products capable of distant transport and the conse- 
quent increase of consumption ; or where the manufacture is car- 
ried on amidst a dense population, creating an extensive local de- 
mand. Where the population is limited, many trades, elsewhere 
distinct, are practised by the same individual. In a small village, 
the same person is surgeon, doctor, and apothecary; while in a 
large city there is separate employment for each of these practi- 
tioners, and even for subdivisions of their profession into the 
several occupations of dentists, oculists, accoucheurs, etc. The 



THE DIVISION OF LABOR. 51 

village grocer deals not only in groceries, but in dry-goods, 
crockery, hardware, books, and stationery ; and if a Yankee, he 
may also edit, print, and publish a newspaper, keep a school, and 
go to Congress, In large cities, the sale of a single article of 
grocery may form a large and lucrative business : in Boston and 
New York, there are shops where nothing is sold but tea. All 
improvements in the modes of transportation, as by roads, canals, 
and railways, obviously promote the Division of Labor, by widen- 
ing the market which each locality can command for its special 
products. 

" The Division of Labor is also limited, in many cases," says Mr. 
Mill, "by the nature of the employment. Agriculture, for ex- 
ample, is not susceptible of so great a division of occupations as 
many branches of manufactures, because its different occupations 
cannot possibly be simultaneous. One man cannot be always 
ploughing, another sowing, and another reaping. A workman 
who only practised one agricultural operation would be idle eleven 
months of the year. The same person may perform them all in 
succession, and have, in almost every climate, a considerable 
amount of unoccupied time. The combination of labor of which 
agricultural industry is susceptible is chiefly that which Mr. 
Wakefield calls Simple Co-operation, — many persons employed 
together in the same work. To execute a great agricultural im- 
provement, it is often necessary that many laborers should work 
together ; but in general, except the few whose business is super- 
intendence, they all work in the same manner. A canal or a rail- 
way embankment cannot be made without a combination of many 
laborers ; but they are all excavators, except the engineer and a 
few clerks." 

The advantages of the Division of Labor, however, we must ad- 
mit, are subject to one serious drawback. Few things tend so 
effectually to dwarf the mind and stunt the faculties as the inces- 
sant and long-continued repetition of a very simple task, — a 
mechanical movement, which is repeated with as little effort of 
thought as if it were performed by a machine. Even Adam 
Smith remarks, that constant application to such a task " neces- 
sarily renders the workmen as stupid and ignorant as it is pos- 
sible to make a human being." And Say adds, that "a man 
whose whole life is devoted to the execution of a single operation 



|52 THE DIVISION OF LABOR. 

•will most, assuredly acquire the facility of executing it better and 
quicker than others ; but he will, at the same time, be rendered 
less lit for every other occupation, bodily and intellectual ; his 
other faculties will be gradually blunted and extinguished, and 
the man, as an individual, will degenerate in consequence. To 
have never done anything but make the eighteenth part of a pin 
is a sorry account for a human being to give of his existence." 
The division even of intellectual labor, however it may tend to 
excellence, and insure success, in a single department, is not 
without a similar pernicious result. The successful piu-suit of a 
single art, or of tlie fraction of a single science, is but poor com- 
pensation for the loss of all versatility and alertness of mind, and 
for allowing most of the facidties to rust by disuse. One may 
iDecome a good accountant, an expert mathematician, even a 
skilful lawyer, without being anything more than the fraction of 
a man. 

" The difference of natural talents in different men," says Adam 
Smith, " is, in reality, miich less than we are aware of; and the 
very different genius wnich appears to distinguish men of different 
professions, when grown up to maturity, is not, upon many oc- 
casions, so much the cause, as the effect, of the Division of Labor. 
The difference between t:he most dissimilar characters — between 
a philosopher and a common street-porter, for example — seems 
to arise, not so much from nature, as from habit, custom, and edu- 
cation. When they came into the world, and for the first six or 
eight years of their existence, they were very much alike, and 
neither theif parents nor playfellows could perceive any remarka- 
ble difference. About that age, or soon after, they come to be em- 
ployed in very different occupations. The difference of talents 
comes then to be taken notice of, and widens by degrees, till, at 
last, the vanity of the philosopher is willing to acknowledge scarce 
any resemblance. But without the disposition to truck, barter, 
and exchange, every man must have procured to himself every 
necessary and conveniency of life which he wanted. All must 
have had the same duties to perform, and the same work to do; 
and there could have been no such difference of employment as 
J30uld alone give occasion to any great difference of talents." 

'" As it is this disposition which forms that difference of talents 
80 remarkable among men of different professions, so it is this 



EFFECTS OF IMPROVED MACHINERY. 63 

same disposition -which renders that diffei-ence useful. Many 
tribes of animals, acknowledged to be all of the same species, derive 
from nature a much more remarkable distinction of genius, thau 
what, antecedent to custom and education, appears to take place 
among men. By nature, a philosopher is not in genius and disposi- 
tion half so different from a street-porter, as a mastiff is from a 
greyhound, or a greyhound from a spaniel, or this last from a 
a shepherd's dog. Those different tribes of animals, however, 
though all of the same species, are of scarce any use to one 
another. The strength of the mastiff is not in the least sup- 
ported either by the swiftness of the greyhound, or by the sagaci- 
ty of the spaniel, or by the docility of the shepherd's dog. The 
effects of those different geniuses and talents, for want of the 
power or disposition to barter and exchange, cannot be brought 
into a common stock, and do not in the least contribute to the 
better accommodation and conveniency of the species. Each ani- 
mal is still obliged to support and defend itself, separately and in- 
dependently, aud derives no sort of advantage from that variety 
of talents with which nature has distinguished its fellows. Among 
men, on the contrary, the most dissimilar geniuses are of use to 
one another ; the different products of their respective talents, by 
the general disposition to truck, barter, and exchange, being 
brought, as it were, into a common stock, where every man may 
purchase whatever part of the produce of other men's talents he 
has occasion for." 

The superior efficiency and productiveness of industry at the 
present day, as compared with the industry of former times, is due 
not only to the Division of Labor, but to the use of better tools 
and implements, and to the invention of improved machines and 
cheaper processes of manufacture. Perhaps the leading character- 
istic of the nineteenth century has been the rapid progi'ess of in- 
vention, and the consequent multiplication and cheapening of all 
the material products that satisfy human wants. These improve- 
ments consist in economizing man's time and industry, either by 
causing natural agencies, such as steam, electricity, magnetism, or 
heat, to do the work, or by making a happier application and more 
frugal use of the powers already employed. " One of the most 
striking qualities of machinery," says Mr. Senior, " is its suscepti- 
bility of indefinite improvement." In the manufacture of vi-on and 



54 EFFECTS OF IMPKOVED MACHINEEY. 

steel, and the application of them to a vast number of new purpos- 
es; in the transportation of men and goods, and the transmission 
of intelligence ; in the use of new materials, such as caoutchouc, 
gutta-percha, gas, and petroleum ; in the work of a great printing- 
office, like that of The Times newspaper ; and even in the imple- 
ments and processes of agriculture now in use, — so much has 
been accomplished, that we may safely say the amount of possible 
enjoyment has been quadrupled, and one man now often does 
what would have been the work of a thousand only fifty years ago. 

Often the immediate consequence of introducing an improved 
process, or a new machine, is so to economize human labor that 
many workmen are thrown out of employment, and wages are, for 
a while, considerably depressed. In most cases, however, the ulti- 
mate result is, through cheapening the price, so far to increase the 
demand for the products, that more persons than ever are employed 
in their formation, and wages rise again. Kailroads have, in a 
great degree, created the travel and the traffic which they so 
much facilitate and cheapen, and thus give employment to labor- 
ers greatly exceeding in number the stage-drivers and wagoners 
whose occupations were superseded by them. The invention of 
printing deprived many copyists of work and wages, but has so 
multiplied books and newspapers, that there are now probably 
more persons employed in making books, than there were, in the 
fifteenth century, in reading them. Generally speaking, the pro- 
gress of invention has enlarged, rather than contracted, the field 
for the employment of industry. 

But I doubt whether it has been so in every instance. The de- 
mand for an article is sometimes limited by natural causes, irre- 
spective of its dearness or cheapness; and in such case, any 
improvement which will diminish the labor required for its pro- 
duction must permanently deprive some laborers of employment. 
Thus, the demand for bread must be limited by the size of the 
population, — that is, by the number of mouths to be fed : cheapen 
its production ever so much, and very little more will be called 
for. Hence, it may be feared, the use of the steam-engine in 
many kinds of farm-work, and the recent invention of so many 
sowing, reaping, mowing, and threshing machines, have permanent- 
ly diminished the number of agricultural laborers, and thereby 
lowered the rates of wages everywhere, even in manufactures. 



THE NATUEE OF CAPITAL. 55 

This is one of the causes — others will be pointed out hereafter 
— why the number of persons engaged in agriculture in Great 
Britain is constantly becoming less, so that a process of depop- 
ulating the rural districts seems to be going on, at the same 
time that pauperism is increasing, and the multitudes who take 
refuge in the cities and manufacturing towns find little employ- 
ment there and scant wages. Through the extended use of such 
machinery, indeed, a great farm comes to resemble a huge manu- 
factory, in which steam furnishes the whole motive power, and the 
number of human beings employed is small out of all proportion 
to the quantity of work done. This result is a triumph of inven- 
tive skill and money-making ingenuity ; but it is a matter of evil 
omen for the classes who are entirely dependent upon the wages 
of labor. The recent invention of the sewing-machine has taken 
away work and wages from many seamstresses, journeymen tailors, 
and shoemakers ; and I doubt whether it has increased, in any- 
thing like the same degree, the demand for clothes, boots and 
shoes, and other sewed fabrics ; since this demand must be regu- 
lated by the number of people who need to be clothed and shod. 
The construction of machineiy, of railroads and canals, and of 
great works of irrigation, as in India, not only lessens the demand 
for manual labor, but takes away from the power of paying wages 
for it, through converting large amounts of Circulating Capital into 
Fixed Capit&I. 



CHAPTER IV. 

THE NATURE OF CAPITAL, AND THE MEANS OF ITS INCREASE : CIR- 
CUMSTANCES WHICH FAVOR THE GROWTH OF CAPITAL : THE SECU- 
RITY OF PROPERTY. 

Another circumstance on which the efficiency of labor largely 
depends is the co-operation of capital, or stock. All capital is 
wealth, but all wealth is not capital. The furniture of a rich 
man's house, for instance, — his carpets, his plate, his paintings, 
and much even of the food which is daily placed upon his table, — 
forms a portion of his wealth, but not of his capital. All these 
articles contribute to his enjoyment ; perhaps some of them are 



56 THE NATUEE OF CAPITAL. 

necessary for his sustenance ; but they do not directly aid him in 
the creation of other values. As they are consumed, or slowly 
worn out, they create nothing to replace them, and leave behind 
them nothing but the remembrance of the gratification which 
they have afforded. They are the fruit of previous industry in- 
deed, having been created, as all other values are, by labor ; but 
with the exception of the little food which is necessary to support 
life, they do not sustain present labor, — do not aid in the produc- 
tion of fresh values. Capital is that portion of wealth which is 
consumed, not for purposes of mere enjoyment, not for immediate 
gratification, hut to aid in the production of more wealth. It is 
still consumed, with greater or less rapidity ; but its value disap- 
pears in one shape only to reappear in another. 

The necessity for the employment of capital arises from the 
fact that man cannot labor to any good purpose with his hands 
alone. He must have tools, implements, machinery, raw material ; 
if the article on which he is engaged requires time for its manufac- 
ture, he must be fed, clothed, and lodged while he is occupied in 
manufacturing it. The aggregate of wealth existing in these various 
forms, designed either to aid the laborer in his work, or to support 
him lohile loorking, is capital. It is consumed, but its value ap- 
pears again in the larger amount of wealth which industry pro- 
duces when thus assisted. The tools and machinery wear out; but 
the products which they have aided in creating enable the capital- 
ist to replace them with a profit. Raw cotton is consumed in large 
quantities, and reappears as cloth ; the seed-corn is buried in the 
earth, but in a few months the harvest yields twenty or thirty fold. 

Labor is limited by capital, because labor cannot be prosecuted 
to any advantage without capital. Yet this fact does not contra- 
dict our general proposition, that wealth is created by labor alone; 
for capital itself is created by labor, and might be called consoli- 
dated or invested labor. But although labor is thus limited, it is 
by no means proportioned to the amount of capital employed. A 
master-shoemaker, with a capital of not more than $ 5,000, may 
keep twenty journeymen and apprentices in constant employment; 
while a manufacturer of gold and silver plate, or a wholesale mer- 
chant, with a capital of half a million of dollars, may not pay wages 
to more than thirty or forty persons. McCulloch observes, that 
" a manufacturer's power to employ labor is not measured by the 



THE NATURE OF CAPITAL. 57 

total amount of his capital, but by the amount of that portion 
only which is circulating capital. A capitalist possessed of a hun- 
dred steam-engines, and of £ 50,000 of circulating capital, has no 
greater demand for labor, and does not, in fact, employ a single 
"workman more, than the capitalist who has no machinery, and only 
£ 50,000, devoted exclusively to the payment of wages." Boots 
and shoes, for instance, were formerly manufactured without ma- 
chinery, and with the aid only of a few cheap tools. With a lap- 
stone, a hammer, a knife, and an awl, the journeyman can begin 
work ; and even the raw material which he needs is so frequently 
" turned over," as the phrase goes, or so quickly converted from 
leather into merchantable boots and shoes, that, if the articles can 
be sold as soon as they are manufactui-ed, a few dollars will keep 
him constantly supplied with sufficient stock. On the other hand, 
an immense capital must be vested in machinery before the busi- 
ness of weaving cotton or woollen cloth on a great scale can begin. 
Even in the rudest states of societ}', among savage nations, capi- 
tal exists, though in small quantities, and performs its appropriate 
functions. " The wretched native of New Holland," says Colonel 
Torrens, " has his spear, his fishing-implements, and his canoe, for 
the purpose of abridging his labor, — of performing operations of 
which he would otherwise be incapable, and appropriating produc- 
tions of nature which, but for the aid of these rude instruments, 
would forever have remained beyond his reach." Before he labors 
directly to captm-e the wild tenants of the forests and the rivers, 
he labors to prepare himself for the task by manufacturing the 
necessary implements ; consequently, the exchangeable value of 
the articles which he finally obtains is measured by the quantity 
of labor, both direct and indirect, which was devoted to their pro- 
duction. No one will give labor of either sort for nothing. That 
which was bestowed on the manufacture of bows and arrows must 
be compensated just as much, and in the same ratio, as tliat which 
was given to the pursuit and killing of wild animals ; otherwise, 
no one will make bows and arrows. The law of distribution, 
therefore, that the value of the completed product will be divided 
among its producers in exact proportion to the labor bestowed by 
each, is not altered by the co-operation of capital with labor. The 
profits of capital are the reward of labor, just as much as the 
wages directly paid to the laborer. 



58 THE NATUEE OF CAPITAL. 

Capital exists, as I have said, among savages ; and it accu- 
mulates very rapidly with the progress of civilization. So rapid, 
indeed, is its increase, and so vast becomes its aggregation, that it 
constitutes the chief difference in point of efficiency between the 
labor of the savage and that of civilized man. The Australian or 
the Indian may be as muscular as the European ; he often works 
as hard, and is even moi-e capable of enduring hardship and 
privation. He also practises the division of labor to some extent, 
as a whole tribe often unite in the chase or in war, and make 
larger captures by acting in concert and parcelling out the 
work among each other. But their labor on the whole is miser- 
ably inefficient and unproductive, because it is aided only by a 
trifling amount of capital. 

The savage does not amass capital, because he is incapable 
of foresight and self-denial. What he obtains is devoted to the 
gratification of the present moment, or is wasted. This, in truth, 
is the chief reason why he does not till the ground ; he often has 
knowledge enough for this end, his powers of observation being 
largely developed. He notices slight peculiarities of vegetation, 
which escape the eye of the white man, and by this means is 
often enabled to find his way through the trackless forests. He 
knows that edible fruits and grains are produced from seed. But 
he is not economical and prudent enough to reserve seed-corn for 
agriculture, or to lay in a store of food which will enable him to 
expend labor on the ground, to dig and plant, with the expecta- 
tion of reaping the fruits of his labor only after an interval of 
some months. He is obliged to give all his toil to the necessities 
of the present hour, because he is not prudent enough to save, 
and not industrious enough to work when there is no immediate 
necessity for working. 

Though the common opinion runs the other way, I believe that 
man has no natural instinct for saving, no original propensit}^ for 
labor, — none, at least, that is not constantly overridden by other 
and stronger propensities. The hardest lesson for children and 
savages to learn is that of economy, — the necessity of bridling 
the inclination or appetite of the moment, with a view to some 
prospective benefit. Long and hard experience has taught this 
lesson to the full-grown and reflecting man, and taught it so 
effectiially that, as is often the case, the acquired inclination 



HOW CAPITAL IS ACCUMULATED. 59 

overrides the original impulse, and all other passions are merged, 
not merely in the love of accumulation, but in that of saving. 
We not infrequently hear of misers who will give away thousands, 
while they are depriving themselves almost of the necessaries of 
life for the sake of saving units. Exertion is naturally pleasant, 
it is true ; yet only when directed by the caprice of the moment, 
as in sport ; not the long-continued and monotonous exertion 
which is necessary for the attainment of a future good. That 
always requires self-restraint, a contest with and a victory over 
our original inclinations. 

This view of the difference between the barbarian and the 
civilized man leads directly to a knowledge of the origin of capi- 
tal, and the means of its increase. It begins in saving, and is 
enlarged only by the continued exercise of frugality. Labor 
creates wealth, the object of which is, as we have seen, the grat- 
ification of desire ; and the portion of wealth which is saved 
from the gratification of our immediate wants, and reserved to 
aid our futm-e labor, so that the future product may be gi'eater, is 
capital. 

The inducement to the practice of such frugality is always 
strong enough in a civilized community ; for the ability to save 
increases in a geometrical ratio with its exercise. Cent le pre- 
mier 2^cts qui coiite. The hardest struggle, the severest exercise of 
self-denial, is to make the beginning, — to spare a little from our 
daily comforts, when as yet we are entirely dependent upon the 
fruits of our unaided labor. Afterwards, that little which was re- 
served works along with us, and the surplus is greater at the end 
of the second year, though we have practised no additional self- 
restraint. Soon, the aggregate of these savings produces more 
than our original earnings, and our expenditures may come up 
again to the full measure of what they would have been if no fru- 
gality had been practised at the outset ; and yet accumulation 
goes on as rapidly as if we had been able to reserve the whole 
original product of our labor, and subsist upon nothing. The in- 
dustrial organization of society is now so perfect, that the smallest 
savings can be utilized, or devoted immediately to active employ- 
ment as capital. This rapid progress of accumulation, operating 
like the constantly accelerating force of gravitation, supplies the 
strong motive for frugality, which operates like a charm in the 
swift growth of national opulence. 



60 HOW CAPITAL IS ACCUMULATED. 

It is now easy to explain the difference, on which so much stress 
is laid, between Productive and Unproductive consumption. Take 
the case, referred to in a former chapter, of a laborer who has 
saved $100 from his yearly earnings. At the end of the year, 
having this sum in reserve, he may immediately expend it all in 
giving an entertainment to his friends, or purchasuig finer clothes 
and furniture for his family. In neither case would the values 
thus consumed aid, either his labor, or that of any other being : in 
the first case, it would be consumed all at once, the wine being 
drunk, the music heard, the delicacies eaten ; and there would be 
an end of his savings : in the other case, the enjoyment would only 
be spread over a little longer time ; the clothes and furniture, in 
the course of a few months or years, would be worn out, and the 
$100 would then have equally disappeared without return. Such 
is what is termed Unproductive consumption. 

But let us suppose, as before, that at the end of the year, he 
placed the money in a Savings' Bank, or bought a machine with it, 
by the aid of which his labor would produce half as much again 
as in the former twelvemonth. In the bank, as has been shown, 
it would successively and rapidly assume different forms, at each 
transformation aiding labor or setting it in motion, at each yield- 
ing a profit, and leaving a final profit for the benefit of him who 
deposited it. This share of profit accruing to the owner is com- 
paratively small, because he has committed the management of his 
property, and the risk of losing it, to others, and they must be 
paid for the labor and hazard of its superintendence. If he 
chooses to use it himself, as in the case supposed of purchasing a 
machine with it, his yearly earnings will be much increased, and 
the surplus will be enough to keep the machine in repair, to buy 
another when the first one is worn out, and to leave a larger profit 
at the end of the year ; which surplus, again, he may spend pro- 
ductively or unprcductively. 

In all the cases now enumerated, it is evident that the laborer''s 
surplus earnings are consumed. In the first two cases, being con- 
sumed only to obtain present enjoyment, whether of a longer or 
shorter duration, they never appear again ; in the last two, being 
consumed only for the purpose of aiding labor, they reappear in 
the increased product of that labor. And so it must be in every 
Bupposable case, except where the savings are obtained in the form 



HOW CAPITAL IS ACCUMULATED. 61 

of gold or silver money, and are buried in the earth ; then, in- 
deed, they are not consumed, because they are not used at all, 
either for present gratification or future gain. 

We see the fallacy, then, of the common opinion, that the prodi- 
gals who waste their substance in riotous or ostentatious living, 
thoxigh they and their families afterwards suffer for it, are yet bene- 
factors to the community, because their liberal expenditures keep 
laborers in employ, increase the profits of shop-keepers, and dif- 
fuse benefits all around them. He who saves, on the contrary, 
appears in the light of one wdio hoards ; saving seems but another 
word for keeping a thing to one's self, while spending appears to 
be distributing it among others. 

This popidar error arises chiefly from the fact that the waste- 
ful person consumes his income and his capital mostly on the spot 
where he resides, where the public eye can follow his wealth, and see 
it passing into the hands of laborers, tradesmen, and dependents. 
But these persons do not obtain it for nothing. They give ser- 
vices, goods, articles of luxury, in exchange ; and when these 
services are rendered, and the articles consumed, there is an end 
of the prodigal's wealth. He has nothing left, and they are but 
little richer than before, having only made their ordinary gains, or 
received their accustomed wages. The community, then, is the 
poorer by the whole amount which the prodigal has squandered. 
The savings of the frugal person, on the other hand, are often 
withdrawn from sight of the immediate neighborhood, being 
quietly invested in a bank or manufactory, where they are con- 
sumed productively ; that is, they are still applied to the purchase 
of labor or goods, and so equally keep industry in motion, though 
this beneficial result is not easily traced back, and ascribed to the 
proper author of it. 

To make this point clearei', I will take a particular example. 
Suppose a prodigal maintains an establishment of ten menial ser- 
vants, at an expense of $ 3,000 a year. At the end of the year, 
he has expended this portion of his capital, and the servants have 
received their usual wages ; but as they have toiled only to pam- 
per his desire of enjoyment, and to gratify his love of ostentation, 
no products of their labor remain at the end of the year, and they 
are no better off than they w'ould have been if they had obtained 
equal wages for making boots and shoes, or laboring on a farm. 



62- HOW CAPITAL IS ACCUMULATED, 

Then suppose a frugal person, having an equal sum of $ 3,000 a 
year to spend, instead of hiring menial servants with it, should in- 
vest it in the shoemaking business, or in agriculture. It is obvious 
that an equal number of persons might thus be employed, and at 
the same wages ; at the end of the year, moreover, instead of noth- 
ing being left, there would be an additional stock of one or two 
thousand pairs of boots and shoes, or of four or five thousand bush- 
els of corn. The capital of the frugal person and the riches of the 
community would thus be augmented to the extent perhaps of 
$ 4,000 (ordinary allowance being made for profits) ; and this 
would be a fund for the support of industry, for an indefinite pe- 
riod, or until it came into the hands of a prodigal who should 
waste it in luxuries and self-indulgence. 

It should be observed, that the only fund from which savings 
can be made, and capital thereby increased, is the annual income 
or revenue of the individual. If the manufacturer, for instance, at 
the end of the year, has merely got his capital back again, the 
values created exactly replacing those which were consumed, though 
he has preserved his property, he has effected no saving ; he is 
neither richer nor poorer than he was before. His capital ought 
to be replaced with a profit ; and the aggregate of the profits for a 
year, not the aggregate of all the values produced during that 
time, constitutes his income or revenue. This income, like the 
year's wages of a laborer, seems to be the fund natui'ally designed 
for his own maintenance and that of his family. A portion of it must 
be spent in this manner, — that is, must be spent unproductively ; 
for health and strength must be kept up by food, drink, and cloth- 
ing ; in addition to which, in order to keep up the full vigor of 
mind and body, a small portion of every one's income ought to be 
devoted to amusement and a few luxuries. But if these personal 
expenditures, and the replacement of the capital consumed during 
the year, do not absorb the whole income, what remains is a true 
saving, an addition to capital, a benefit both to the individual and 
the community. 

" It would be a great error," says Mr. Mill, " to regret the large 
proportion of the annual produce which, in an opulent country, 
goes to supply unproductive consumption. It would be to lament 
that the community has so much to spare from its necessities, for 
its pleasures and for aU higher uses. This portion of the produce 



FIXED AND CIRCULATING CAPITAL. 63 

is the fund from which all the wants of the community, other than 
that of mere living, are provided for, — the measure of its means of 
enjoyment, and of its power of accomplishing all purposes not pro- 
ductive. That so great a surplus should be available for such pur- 
poses, aiad that it should be applied to them, is a subject only of 
congratulation. '' 

The wealth which is employed in creating more wealth has 
been divided by Adam Smith into Fixed and Circulating Capital. 
" There are two ways," he says, " in which a capital may be em- 
ployed so as to yield a revenue or profit. 

" First, it may be employed in raising, manufacturing, or pur- 
chasing goods, and selling them again with a profit. The capital 
employed in this manner yields no revenue or profit to its em- 
ployer while it either remains in his possession or continues in the 
same shape. The goods of the merchant yield him no revenue or 
profit till he sells them for money, and the money yields him as 
little till it is again exchanged for goods. His capital is continual- 
ly going from him in one shape, and returning to him in another ; 
and it is only, by means of such circulation, or successive ex- 
changes, that it can yield him any profit. Such capitals, there- 
fore, may properly be called Circulating capitals. 

" Secondly, it may be employed in the improvement of land, in 
the purchase of ulSeful machines and implements of trade, or in 
such like things as yield a revenue or profit without changing 
masters, or circulating any further. Such capitals, therefore, may 
properly be called Fixed capitals." 

This distinction has been further illustrated by the remark, that 
Circulating Capital fulfils the whole of its ofiice in production by a 
single use ; while Fixed Capital produces its effect, not by being 
parted with, but by being kept, and its efficacy is not exhausted 
by a single use. Observe, also, that the same articles may be Cir- 
culating Capital while in the hands of one person, and become 
Fixed Capital as soon as they are transferred to another. A stock 
of finished ploughs, for instance, belongs to the former class while 
they are owned by the manufacturer, or the merchant, who expects 
not to use, but to sell them, and can obtain his profit only from 
the proceeds of such a sale ; but they become Fixed Capital when 
they are purchased by the farmers, who expect to retain and use 
them till they are worn out. 



64 THE NATURE OF CAPITAL, 

Fixed Capital, Adam Smith remarks, " consists chiefly of the 
four following articles : — 

" First, of all viseful machines and implements of trade which 
facilitate and abridge labor. 

" Secondly, of all buildings used for the purpose of trade or 
manufacture, such as shops, warehouses, and farm buildings. They 
are a sort of instruments of trade, and may be considered in the 
same light. 

" Thirdly, of the improvements of land, — of what has been prof- 
itably laid out in clearing, draining, enclosing, manuring, and re- 
ducing it into the condition most proper for culture. An improved 
farm may be regarded in the same light as one of those useful ma- 
chines which facilitate and abridge labor. 

" Fourthly, of the acquired and useful abilities of all the mem- 
bers of the society. The acquisition of such talents by the main- 
tenance of the acquirer during his education, study, or apprentice- 
ship, costs an expense, which is a capital fixed and realized, as it 
were, in his person. The improved dexterity of a workman may 
be considered in the same light as a machine or instrument of 
trade which facilitates and abridges labor. 

" The Circulating Capital is composed likewise of four parts : — 

" First, of the money by means of which all the other three are 
circulated and distributed to their proper consumers. 

" Secondly, of the stock of provisions in the possession of the 
butcher, the grazier, etc., for the purpose of sale. 

" Thirdly, of the materials, whether altogether rude, or more or 
less manufactured, — of clothes, furniture, and building, which are 
not yet made up, but remain in the hands of the growers, manu- 
facturers, or merchants. 

" Fourthly, of the work which is made up and completed, but is 
still in the hands of the merchant or manufacturer ; such as the 
finished work in the shops of the smith, the goldsmith, the jewel- 
ler, and the China merchant. The Circulating Capital consists in 
this manner of the provisions, materials, and finished work of all 
kinds, which are in the hands of their respective dealers, and of 
the money that is necessary for circulating and distributing them 
to their final consumers." 

To this enumeration by Adam Smith must be added two classes 
of articles, which seem to have been excluded by him for insufii- 



HOW CAPIT.Ui IS INClfEASED. 65 

cient reasons ; namely, food and the other necessaries of life, and 
dwelling-houses. The name of capital has been denied to thcso 
two classes of things, because they are consumed as revenue, with 
a view to subsistence or enjoyment, and not as capital, with a view 
to production. But it may be replied, that the laborer, before he 
can construct or fashion anything, must not only have raw mate- 
rials and tools, but must be secure of a lodging and a dinner. An 
expenditure for all four of these objects is necessary before ho can 
complete his task ; and the aggregate of such expenditm-e is there- 
fore properly considered as an advance of capital, the means for 
this advance having been previously obtained by abstinence or 
frugality. 

The circumstances on which the rapidity of accumulation, or 
the gi-owth of capital, depends, are various, and the study of them is 
one of the most interesting researches in which the economist or 
the historian can engage. Laws and political institutions generally 
have a vast influence in this respect, as well as differences of na- 
tional character and peculiarities of geographical position. Tho 
results of the former may often be traced, by the light both of 
theory and history, in quarters where they would be the least sus- 
pected ; the most prominent and marked effect being frequently at- 
tributable to the noiseless working, through many generations, of 
peculiar customs and laws, which do not attract much notice pre- 
cisely because they are ingrained or deeply seated. 

Our general question is. When is labor most energetic, universal, 
and effective in the creation of wealth, and by what means are the 
motives to acciimulation from savings most strongly stimulated % 
I cannot attribute much importance in this respect to what arc 
called the natural advantages of a country, — its genial climate, 
fertile soil, large expanse of territory, or happy geographical po- 
sition. These natural advantages, as they are termed, have fear- 
ful drawbacks in the indolence and sense of security which they 
foster, and the luxurious habits to which the people who possess 
them incline, their chief luxury always being repose. Some of the 
countries of South America are as highly favored in thcso respects 
as any part of the habitable globe ; but it is not to this portion of 
our continent that we look for instances of the most rapid growth 
of national wealth. " In the ancient world and in the Middle 
5 



66 HOW CAPITAL IS INCREASED. 

Ages," it has been well remarked, " the most prosperous commimi- 
ties were not those which had the largest territory or the most 
fertile soil, but rather those which had been forced by natural ste- 
rility to make the utmost possible use of a convenient maritime 
situation ; as Tyre, Marseilles, Venice, the free cities on the Baltic, 
and the like." And that we may not over-estimate even this con- 
venience of position, it should be remembered that Athens, Tyre, 
and Venice stand just where they did, though their commercial 
glory has long since passed away. The geographical position of 
Greece, with its long line of deeply indented sea-coast on a tideless 
sea, is precisely what it was when Greece almost monopolized the 
commerce and the arts of the Mediterranean. She is now the 
most insignificant kingdom in Europe, and with difficulty supports 
an ignorant and thinly scattered population. 

Natural wealth enervates both body and mind. Where an 
abundance can be had with little labor, much labor will never be 
practised. What seems a paradise on earth, the nearest natural 
semblance of a Garden of Eden, may be found in the isles of the 
South Pacific, or in the West Indies, where a race of white colo- 
nists seem to be fast becoming as feeble and brutish as were the 
natives whom they dispossessed. Here again, as in so many other 
instances, we are reminded that the essential quality of wealth, 
properly so called, is difficulty of attainment, — difficulty that can 
be overcome only by long and strenuous exertion. 

The principal causes of the rapid growth of national opulence 
are moral rather than physical ; a situation which shall make for- 
eign commerce at least practicable seems to be the only indispensa- 
ble condition that is not connected with the character of the people. 
The moral causes which most effectually stimulate labor and frugal- 
ity, and thereby make capital accumulate most rapidly, are, — 

1. That the laborer shall be sure of receiving the full amount 
of his wages, or shall be protected in the ownership of the values 
which he has produced. 

2. That the skill, intelligence, and education of the laboring 
classes generally shall be raised to the highest point, — so that, 
the labor of one well-trained mechanic being as effective at least as 
that of three raw hands or mere laborers, the working class shall 
contain as many as possible of the former, and as few as possible 
of the latter description. 



TIIK SECUEITY OF PEOPEETY. 67 

3. That the savings when made, or the capital when accumu- 
lated, shall be attended v.ith as high a rate of profit, and as large 
a measure of physical comfort, social consideration, and political 
influence as possible. 

The illustrations which may be oftered upon these three points 
are enough, I think, to prove that they are vastly more important 
than any amount of natural advantages, including even that on 
which most stress has been laid, — the inherited qualities of race, 
or the national, inbred inclination to labor and enterprise. I am 
no great believer in the natural excellences of Anglo-Saxon blood, 
but I have great faith in the acquired excellences of Anglo-Saxon 
institutions. My reason for distrust in the former element is, that 
time was, — and not many years ago, — when the Dutch certainly, 
if not the Swiss also, were decidedly superior to the English in in- 
dustry, frugality, and the spirit of commercial adventure. In this 
last respect, even the Spaniards and the Portuguese were ahead of 
their English competitors. And here in America, where our pop- 
ulation is a conglomerate of all the races of the earth, the first 
generation born on American soil, be its parents English, Irish, 
Dutch, French, or German, is sure to show the characteristic 
American trait, — a disposition to toil, to dare, and to save. I am 
inclined to refer this peculiarity altogether to our " institutions " ; 
— understanding, however, this term in its widest sense ; making 
it comprehend not merely our republican polity, our national and 
State organizations, but our republican habits, feelings, and ten- 
dencies, — our disposition to manage our own affairs in oiu- own 
town-meetings, and there to allot the gi-eatest trust to him who is 
distinguished above all others by this very American trait, this dis- 
position to toil, to dare, and to save, be his race or parentage what 
it may. 

First, then, security in the receipt and enjoyment of the fruits 
of labor is not merely the great stimulus, but the indispensable 
prerequisite, to general industry and frugality. " Security " means 
not only the absence of war, tyranny, intestine commotions, and 
all other causes of spoliation, interference, and undue control, but 
the absence of any dread, — of any great probability of such un- 
happy contingencies. Labor and enterprise are elastic, and will 
quickly recover from the effects of any sudden or unexpected mis- 
fortune, however great, if the workmen or adventurers think they 



68 HOW CAPITAL IS INCREASED. 

have a reasonable protection against its recurrence. If the calam- 
ity is such that the country is not actually depopulated by it, the 
next harvest will make up the temporary scarcity of food, and less 
than a year's labor Avill replace the customary stock of manufac- 
tured commodities ; for the Circulating Capital of the manuflicturer 
is usually " turned over," as the phrase goes, or consumed and re- 
produced, oftener than once in a year ; and if his Fixed Capital, his 
machines, buildings, and other improvements, require a little longer 
time for their value to be restored, (the potent influence of credit 
causing them to be actually rebuilt in a very short period,) it is 
still matter of certain calculation, that a few years will make up 
the loss. But if a dread should hang over the people, lest a simi- 
lar catastrophe should soon recur, few would labor at all, and these 
few would put but little heart into their work : not many are willing 
to produce what others are to consume. The general feeling 
would be like that which prevails on shipboard after all hope of 
saving the vessel is lost : " Let us eat and drink, for to-morrow we 
die." 

Take, for instance, the once very fertile and finely situated 
tract, called Mesopotamia from its position between the two great 
rivers Tigris and Euphrates, — now a parched and dusty plain, 
roamed over, rather tlian inhabited, by a few tribes of half-starved 
Bedouin Arabs. Yet there stood, and there now stand the ruins 
of, the great city of Nineveh, that " exceeding great city," of three 
days' journey, which probably contained over half a million of 
inhabitants. What a vast suburban and rural population must ^ 
have existed in the immediate vicinity, in order to supply that 
great and wealthy metropolis vath food ! Over three thousand 
years ago, the banks of the Tigris must have been nearly as popu- 
loiis as are now the banks of the Seine near Paris. Their depopu- 
lation and consequent aridity — but few traces now remaining of 
the gigantic works by which that great plain was formerly irrigated 
— must be ascribed to the constant sense of insecurity arising from 
many changes of dynasty, predatory inroads, invasion and con- 
quest, and the rigors of war exercised by barbarian conquerors. 
Yet these invasions, so far as appears from history, were not so 
frequent but that the people might with ease have recovered from 
them during the intervals, had not the constant fear that they 
might recur at any day gradually paralyzed all efibrt, till the na- 



THE SECURITY OF PROPERTY. 6ft 

tion at last wasted away, and a feeble remnant sought shelter 
among the mountains, leaving that fertile plain to desolation. 

Such are the evils of a government which cannot withstand ag- 
gression from abroad. Hardly less injurious in its effects is the 
government which is too feeble or indolent to protect the people 
against themselves ; which cannot enforce the laws, or guard the 
community against the machinations and violence of the turbulent, 
the discontented, and the ambitious, so that society is a constant 
prey to rapine, confusion, and civil broils. Hence the present con- 
dition of Mexico and most of the South American republics, where, 
though the soil and climate are among the finest on earth, and min- 
eral wealth abounds, yet agriculture is impeded, trade languishes, 
and manufactures cannot be established, the bonds of society being 
virtually dissolved, and the country wasted by anarchy and misrule. 

Arbitrary exactions, vmcertain in amount, and uncertain as to 
the time when they will be made, do vastly more injury than 
larger amounts taken by fixed and regular taxation. Industry 
will accommodate itself to heavy burdens, and even flourish un- 
der them, if the pressure be equable and constant, so that all 
calculations respecting the future may be made with as much cer- 
tainty as if there were no weight to support. The regular tax 
comes to be esteemed as oiie of the charges, or a part of the cost, 
of production, — having the same effect as a more rigorous climate, 
or a less fertile soil, would have, in increasing the amount of labor 
required. The people of the United States, for instance, are at 
this moment taxed more heavily, — they pay a larger sum to their 
rulers, than was ever levied from a population of equal size by the 
most cruel and despotic government of ancient times. If it were 
possible to distribute the enormous weight of this taxation with 
perfect equality and fairness, making it bear on all interests alike, 
and on every individual in just proportion to his means, I should 
be far from considering it as any material obstacle to the prosper- 
ity of the country. But the changes which from time to time be- 
come necessary, or are thought to be necessary, in that distribti- 
tion, are more serious evils. The change when completed in all its 
effects, the new law once thoro\ighly incorporated by time with the 
old ones, may be an improvement ; but the transition is always 
injurious. Better a bad system, so that it be fixed, than a fluctuat- 
ing and uncertain one. An alteration of the law, a shifting of the 



70 HOW CAPITAL IS INCEEASED. 

burden, always produces some change in the direction of labor and 
capital, whereby a portion of the skill already acquired by practice 
is wasted, a portion of the machinery already built becomes iBSfe- 
less, and time and capital must be consumed in learning new 
employments and constructing new machines. This is one evil 
caused by change ; and a,nother is, that, most of the operations of 
industry in modern times being complex, and covering much time 
and space, people are tempted to engage in them only by the nice 
calculations that are made of their probable ultimate results : any 
uncertainty as to the manner in which these results may be aftect- 
ed by taxation, any probability that the law may be changed while 
the process is yet incomplete, may prevent the enterprise from be- 
ing undertaken at all. It is not too much to say, that, in this 
country, for the last fifty years, there has not been a time when 
commercial and manufacturing enterprise was not materially re- 
tarded by the apprehension that the Congress then in session, or 
the ensuing one, might make some important modifications in the 
tariff of customs-duties, the banking system, and the state of the 
currency. 

" The only insecurity," says Mr. Mill, "which is altogether par- 
alyzing to the active energies of producers, is that arising from the 
government or from persons invested with its authority. Against 
all other depredators there is a hope of defending one's self. 
Greece and the Greek colonies in the ancient world, Flanders and 
Italy in the Middle Ages, by no means enjoyed what any one with 
modern ideas would call security ; the state of society was most 
unsettled and txu-bulent ; person and property were exposed to a 
thousand dangers. But they were free countries ; they were nei- 
ther arbitrarily oppressed, nor systematically plundered, by their 
governments. Against other enemies, the individual energy which 
their institutions called forth enabled them to make successful re- 
sistance. Their labor, therefore, was eminently productive, and 
their riches, while they remained free, were constantly on the in- 
crease." 

" Much of the security of person and property in modern na- 
tions is the effect of manners and opinion, rather than of law. 
There are countries in Europe where the monarch is nominally ab- 
solute ; but where, from the restraints imposed by established 
usage, no subject feels practically in the smallest danger of having 



THE ENCOURAGEMENT OF MANUFACTURES. 71 

his possessions arbitrarily seized, or a contribution levied on them 
by the government." These countries — Russia, for instance — 
are far better off in respect of security than France, where, not 
long ago, the institutions of government were nominally similar to 
our own, but where there is great probability of a revolution once 
a fortnight. No government is ever wicked enough to aim di- 
rectly and avowedly at the encouragement of vice, the distress of 
innocence, and the punishment of goodness. Even an Asiatic 
despotism professes, and probably intends, to punish theft, perjury, 
fraud, and unprovoked injiu-y, in all cases where its own interest 
is not immediately concerned ; that is, of course, in the great ma- 
jority of cases that arise among its subjects. It may omit many 
of the forms and precautions that civilized nations have come to 
observe as the safeguards of innocence and preservatives against 
miintentional wrong ; it may administer wild justice, but justice 
is its aim ; it wields the sword against unprovoked aggressions up- 
on persons or property, and often with terrible effect. 



CHAPTER V. 

THE INCREASE OF CAPITAL AS AFFECTED BY THE ENCOURAGEMENT 
OP MANUFACTURES, AND BY THE CONCENTRATION OF THE PEOPLE 
IN CITIES AND TOWNS. 

The second of the moral causes indicated as affecting the in- 
crease of capital is, that such increase is most rapid in any coun- 
try when, from the variety of employments that exist there, most of 
its inhabitants may be engaged in those occupations for which they 
are peculiarly fitted by nature, which require most skill and intel- 
ligence, and in which, consequently, their labor is most productive. 

If the labor of one practised and skilful artisan is equal to that 
of at least three raw hands or rude laborers, then it is very much 
for the economical interests of a country, that as many as possible 
of its inhabitants should be skilled artisans, and as few as possible 
should be raw laborers. We say " as many as possible " ; because 
some rude labor is always needed. There must be, in every coun- 
try, some hewers of wood and drawers of water, — some work that 



72 THE ENCOUEAGEMENT OF MANUFACTURES : 

tasks a man's thews and sinews very severely, while it affords but 
little employment to his brains, — such work as is often performed 
by machines and domesticated animals, but which the circumstan- 
ces of time and place sometimes absolutely require to be performed 
by men, — usually by men who are capable of nothing else. There 
is a large proportion of such work required in agriculture, where 
one skilful and careful farmer can profitably direct the exertions 
of a dozen or more hands, in such operations as ditching, fencing, 
making hay, and the like. Many, though not so many, laborers 
of this lowest class are also required in manufactures, where nu- 
merous skilled and expert hands require to be waited on by mere 
porters and hewers, in order that the valuable time of the former 
may not be wasted on the coarser operations that are necessary. 
Thus the bricklayer must have his hod-carrier ; the driver of the 
steam-engine must have his fireman ; the printing-office must have 
its errand-boys, technically called " devils." Commerce demands 
a higher average of skill and intelligence from those who are en- 
gaged in it than any other of the great branches of industry ; yet 
even here, in the various operations subsidiary to the transporta- 
tion and exchange of goods, there is a considerable demand for this 
lowest kind of exertion. We say a "demand" for it, because the 
fact, that laborers of this class expect only the lowest rate of wages, 
causes them to be sought for in preference to all others, when the 
work is such that they can perform it. 

From various causes, there is an abundance of this kind of labor 
in the market in almost every country. The stinted bounty of 
nature; casualties that lessen the average capacity; vice, igno- 
rance, and extreme poverty ; are among the causes which here keep 
the supply up to the demand, and, in nearly all cases, make it go 
greatly beyond the demand. The only evil to be dreaded is a su- 
perfluity of this class of laborers, — a superfluity which sometimes, 
as at present in Great Britain and Ireland, exists to a frightful ex- 
tent. Popular education, as that phrase is commonly understood, 
meaning the general cultivation of the intellect, though unques- 
tionably a very powerful agent for lessening this evil, is not the 
only preservative against it. A man wholly uneducated in the 
common meaning of the word, that is, unable either to write or 
read, may yet become a very expert workman in the finest and 
most difficult kinds of manufacture. On the other hand, men 



RUDE AND SKILLED LABOR. 73 

may be quite well taught, and still be unable to get any but the 
rudest sort of work to do, or to obtain employment more than 
half the time even at that. The Scotch, for instance, are a very 
well educated people ; the standard of instruction among them, 
for all classes, is probably quite as high as it is in New England. 
Yet there is as large a surplus of rude labor in Scotland, in pro- 
portion to its population, as in England, — probably larger. 

The loss which a country suffers by having a large portion of its 
people condemned to this rude labor, when most of them are capa- 
ble, or might be made capable, of much finer work or more effective 
industry, is very great ; so great, indeed, that I doubt whether any 
other single cause of national poverty can equal it. Men are dif- 
ferently constituted by nature, or by those circumstances which, 
in early youth, determine the bent of their inclinations and the 
applicability of their powers to one task rather than another. The 
labor of a people is effectually used only when the field of employ- 
ment in the country offers scope for every variety of taste and 
talent, and when no formidable or insuperable obstacles prevent 
any individual from finding out and performing just that task 
which God and nature appointed him to do. If agriculture alone 
is pursued, all the mechanical skill of the people is wasted, — all 
their fitness for commerce, all their enterprise in trade, is wasted. 
If four millions are obliged to be rude laborers, when three mil- 
lions of them might be skilled artisans, the labor of one of the 
latter being supposed to be equal in value to that of at least three 
of the former, then the value actually created is to the value which 
might be created as four is to ten ; in other words, the yearly pro- 
duct of the national industry might be two and a half times greater 
than it is ; and the yearly unproductive consumption need not be 
at all increased, since, in either case, there would be four millions 
of people to be supplied with food, clothing, and shelter. Of 
course, — and here comes the application of the principle to pres- 
ent circumstances, — the country could afford to pay a higher 
price for their manufactures, for the sake of having the articles 
manufactured at home. They could afford to spend more, for they 
would have more to spend. 

For illustration, we will take the two extreme cases of Ireland and 
Massachusetts. According to the Irish census of 1841, the whole 
number of families in Ireland was one million and a half, of whom 



74 THE ENCOURAGEMENT OF MANUFACTURES : 

one million, or just two thirds of the whole, were engaged in agri- 
culture ; and only three hundred and fifty thousand families, or a 
little less than one fourth of the whole, were employed in manu- 
factures and trade. It is obvious that the agricultural population 
"was excessive ; for in England, where agriculture is carried to greater 
perfection than in any other country on the face of the globe, there 
was but one agricultural family to every thirty-four acres of arable 
land, while in Ireland there was one such family to every fourteen 
acres. In Massachusetts, according to the State census of 1865, 
out of 218,600 men engaged in the various branches of industry, 
about 150,000, or 69 per cent, were employed in manufactures and 
the mechanic arts, and only 68,600, or somewhat over 31 per cent, 
in agriculture and its subsidiary employments. The proportions in 
Ireland, as we have seen, were about 23 per cent in commerce and 
manufactures, and 66 per cent in agi'iculture. 

Now contrast the condition of the people in the two countries. 
The paupers in Massachusetts are about one in fifty of the whole 
population ; but as nearly half of these are recent English or Irish 
immigrants, principally Irish, the real proportion is about one in a 
hundred. In Ireland, the paupers who received relief in the work- 
houses during the year 1866, added to the number of out-door 
poor who were assisted at the public charge, were 270,173, or nearly 
five per cent of the total population. In 1851, the number of 
paupers was nearly thrice as great. The cost of relieving these 
270, 1 73 paupers was over three millions of dollars. 

Can we attribute this frightful difference to the unequal distri- 
bution of the bounty of Providence, — to the fact that the Irish 
are crowded together on land not broad or fertile enough to supply 
them all with food, while Massachusetts abounds with the sponta- 
neous riches of the earth 1 According to the estimate already 
formed of the effect upon national well-being of what are termed 
" natural advantages," this is not very likely to be the case ; but 
let us look at the facts. Here, where our only natural exports are 
ice and granite, it is notorious that we d.o not raise food enough 
for our own consumption. We import nearly all our wheat, the 
chief article of our breadstuflfs, and also buy from the other 
States large droves of cattle. But Ireland raises more food than 
is necessary for her sustenance, and exports annually vast quanti- 
ties of provisions to England. Her export of the cereal grains, 



RUDE AND SKILLED LABOR. 75 

chiefly oats, and of other edible products of the soil, increased, 
from less than seven millions of bushels in 1817, to twenty -si:? 
millions of bushels in 1845. Even in 1847, the year of famine in 
Ireland, nearly eight millions of bushels of gi-ain and meal were 
exported ; and in the following year, which was one of great scar- 
city, these exports rose again to sixteen millions. It is certain, 
then, that the penuriousness of nature is not the source of the 
difficulty ; it is not fertile land which is wanting, but wealth ; and 
the people do not produce that, because the field of employment is 
so limited that very little except rude labor is possible. There is 
no opening for the exertion of skill and enterprise, and whatever 
natural qualifications the people may possess in these respects can- 
not be developed. 

Nearly the whole native population of Massachusetts being oc- 
cupied with tasks that require skill, care, and ingenuity, we depend 
for a supply of rude labor almost exclusively upon immigrant for- 
eigners. These do all the coarse work in building our railways 
and canals, and in the several other occupations that require noth- 
ing but muscular strength. Because our own people are so gener- 
ally trained to the finer and more productive branches of industry, 
new expedients are constantly invented by them for performing the 
drudgery by machines. The locomotive steam excavators, that are 
often employed on the lino of a proposed railroad, and the various 
contrivances that have been patented for cutting and hoisting ice 
on our ponds, are instances of this sort of labor-saving machiner3\ 
The superfluity and consequent cheapness of rude labor in foreign 
countries render these expedients unnecessar\-, and the work is 
profitably done by hand. 

Consider the rapid growth of capital in this State, which is the 
result of this most effective application of its industry, and also 
the immense unproductive consumption of the people, — their 
ample supply, not only of the necessaries, but of the comforts and 
luxuries of life ; and contrast these with the poverty and destitu- 
tion of Ireland. The productive part of the consimiption leads 
to the increase of the national wealth ; the unproductive part is an 
index of the general well-being of the community. In Ireland, 
the people are literally too poor to create a demand for anything 
but potatoes ; and the country therefore affords hardly any market 
either for British or Irish manufactures. There is but httle open- 



76 THE ENCOUEAGEMENT OF MANUFACTUEES : 

ing there for the mechanic arts, or for the many small occupations 
which are created by a due regard for the comforts and convenien- 
ces of life. The field of employment for skilled industry is conse- 
quently limited almost to a span, and the bulk of the people are 
driven back upon rude labor in agriculture, — to ditching, cutting 
turf, and planting potatoes ; the meagre returns from such toil be- 
ing hardly sufficient to keep them from starvation. The United 
States, on the other hand, afford a better market for manufactured 
goods than any other country of equal population on the globe ; be- 
cause the universal prosperity of the community enables them to 
consume more. If the relation of cause and effect in this proposi- 
tion be reversed, so as to say that the people consume more because 
they produce more, it will amount to the same thing, and be equally 
favorable for the purposes of the argument. More wealth is cra- 
ted, more is consumed, and the amount of enjoyment is thereby 
increased. 

Ireland has acted upon this rule, laid down by most political 
economists, — always to buy in the cheapest market, whatever may 
be the effect upon domestic enterprise. Grain and other provision 
can be raised most cheaply in Ireland, owing to the low rate of 
wages there ; manufactures can be produced to best advantage in 
England, owing to the abundance of English capital. Ireland, 
therefore, raises food to buy English manufactures with ; and the 
present condition of the Irish people is the consequence. They 
have the advantage, it is true, of the offer of the manufactured 
goods at prices twenty or twenty-five per cent less than what they 
command in America ; — an advantage which would be more sen- 
sibly felt if the Irish were not too poor to purchase them at any 
price. 

The proposition, I think, can be laid down as a general one, that 
a country, the population of which is chiefly or altogether devoted 
to agriculture, cannot become wealthy, whatever may be the fer- 
tility of its soil or the favorableness of its situation. Of course, 
its inhabitants must buy manufactures with food ; that is, they 
must exchange the products of rude labor for the products of 
skilled labor ; that is, again, they must give the labor of three per- 
sons for the labor of one person. The general principle of econom- 
ical science is, to cause the industry of a country to take that 
direction in which it can be applied to the greatest advantage. 



THE CONCENTRATIOiSr OF THE PEOPLE. 77 

Now the fertility of the soil is one advantage, and the capacity 
of the people for the higher departments of labor, their skill and 
enterprise, is another. There is no reason for allowing either of 
these advantages to remain latent or unworked ; and in choosing 
between them, we are to be decided by their comparative amount 
and importance. Fortunate as this country is in the extent of its 
territory and the richness of its soil, this advantage is as nothing, 
— nay, it would turn out to our positive detriment, — if, in con- 
sideration of it, we should sacrifice the talents and the energies of 
our people ; — if we should doom our whole population to the rude 
labor of turning up the earth, for the sake of the trifling advantage 
of purchasing our manufactured goods at a little lower price. 

The great mistake of Ricardo and his followers, who have done 
so much to reduce Political Economy to a mere deductive science, 
all the conclusions in which are obtained by abstract reasoning 
from a few arbitrarily assumed premises, is, that they generally 
treat of labor in the abstract, and make no allowance for these dif- 
ferences in the quality of the labor. This error vitiates most of 
the doctrines of this school respecting the nature of Value, and the 
distribution of the Value created into the three elements of Rent, 
Profits, and Wages. 

Even Adam Smith remarks, that " a small quantity of manu- 
factured produce purchases a great quantity of rude produce. A 
trading and manufacturing country, therefore, naturally purchases, 
with a small part of its manufactured produce, a gi-eat part of the 
rude produce of other countries ; while, on the contrary, a country 
without trade and manufactures is generally obliged to purchase, 
at the expense of a great part of its rude produce, a very small 
part of the manufactiu-ed produce of other countries." 

One mode in which the encouragement of skilled labor, leading 
to the interfusion of manufactures and commerce with agi'iculture, 
favors the increase of national capital, is, by concentrating the 
population in cities and towns. Agriculture is necessarily diffusive 
in its effects ; the laborers must be distributed over the whole face 
of the territory which they cultivate. A few large cities spring 
up at great distances from each other, as an outlet for the com- 
merce created by the exchange of the surplus agricultural products 
for manufactured goods and other necessaries brought from abroad. 
The great agricultural districts of Continental Europe, the wheat- 



78 THE ENCOURAGEMENT OF MANUFACTURES : 

plains of Poland and Southern Russia, find an outlet at the cities 
of Dantzic and Odessa ; and we may remark in passing, that the 
poverty and general low condition of the inhabitants of these dis- 
tricts show the effects of confining a whole population to the rude 
labor of tilling the ground. It may be that, from their low ca- 
pacity, and their want of education and general intelligence, they 
are incapable of a,nything better. If so, the fact only strengthens 
our argument ; wherever the capacity exists, if it be not developed, 
if a field of employment be not offered to it, the same results must 
follow. Manufactures and commerce, on the other hand, requir- 
ing a great division of labor, and also that the participators in the 
work should be near each other, necessarily create a civic popula- 
tion. They will flourish only in cities and towns, and they are the 
only means of creating cities and towns. 

This principle, perhaps sufficiently obvious in itself, is striking- 
ly illustrated by the differences among the States of this Union. 
Our Southern and Southwestern States are almost exclusively 
agricultiiral ; and south of the northern boundary of Virginia and 
Kentucky, there is but one city. New Orleans, of the first class, 
numbering over 160,000 inhabitants, and but three cities of the 
second class, Richmond, Charleston, and Louisville, each number- 
ing over 35,000. These cities, of course, have sprung up from the 
same causes which sustain Dantzic and Odessa ; — they afford an 
outlet for the surplus produce of the vast agricultural districts 
which depend upon them ; manufactures have hardly contributed 
at all to their growth. If we reckon as civic population those only 
who dwell in cities or towns having at least 12,000 inhabitants 
each, Massachusetts and Rhode Island, two manufacturing States, 
with an aggregate population of only 1,405,686, have nearly as 
large a civic population as these ten agricultural States, who num- 
ber in the aggregate about ten millions. The cities in Massachu- 
setts and Rhode Island have been created almost entirely by 
manufacturing enterprise, these States not having any surplus 
agricultural produce. They are the two most densely populated 
States in the Union. Wherever there is a considerable fall of 
water, affording power to move machinery, there a new city springs 
up, though the soil in the neighborhood should be as barren as 
the Desert of Sahara. But, under the demand for agricultural 
produce created by that city, the dry sand and the hard rock are 



THE CONCENTRATION OF THE PEOPLE. 79 

converted into gardens of fruit and vegetables ; while the plain of 
Eastern Virginia, once almost unsurpassed for fei'tility, its powers 
being now exhausted, is relapsing in part into its pi'imitive wild 
condition. 

Cities and towns are the great agents and tokens of the increase 
of national opulence and the progress of civilization. The revival 
of effective industry, which preceded, and in part caused, the revi- 
val of learning in Europe, took place thi'ough the agency of the 
free towns and great trading-cities, which sprang up most numer- 
ously in Germany and Italy, where they afforded a refuge for the 
arts and the pursuits of peace. Their establishment was the first 
effective blow given to the feudal institutions of the Continent. 
Commerce and manufactures, to w^hich their walls afforded protec- 
tion against the chances of war and the rapacity of the warlike no- 
bles, " gradually introduced order and good government, and with 
them the liberty and security of individuals, among the inhabitants 
of the country, who had before lived almost in a continual state of 
war with their neighbors, and of servile dependency upon their su- 
periors. By affording a great and ready market for the rude pro- 
duce of the country, they gave encouragement to its cultivation 
and further improvement." The word civilization itself, as if to 
indicate the origin and home of the thing, is derived from civis, the 
inhabitant of a city. Sismondi attributes the greater humanizing 
and civilizing influence of the colonies of the ancients over those of 
the moderns to the fact that the former founded cities, wdiile the 
latter spread themselves over much land. In the town, man is in 
the presence of man, — not in solitude, abandoned to himself and 
his passions. The history of the colonization of the borders of the 
Mediterranean, he says, might also be called the history of the civ- 
ilization of the human race. 

The Egyptians, the Phoenicians, the Greeks, and the Romans 
successively formed colonies upon the same general plan. Each of 
these nations became in succession the leaders, the masters, of the 
civilized world in refinement, learning, and the arts ; and the colo- 
nies which they established were the means of diffusing these bless- 
ings among the rude tribes within whose territories the new settle- 
ments were formed. When the mother country became too popu- 
lous, when the inhabitants of its wall-enclosed cities became strait- 
ened for room, detachments of them were sent out to found nev?' 



80 THE ENCOURAGEMENT OF MANUFACTURES: 

homes for themselves on the coasts of other lands. The colony 
was to take care of itself, to be independent of the mother country, 
from the outset. Hence, to protect themselves against the savage 
tribes among whom they came to dwell, they were obliged, as the 
first step, to build a city and encircle it with fortifications. With- 
in its walls they all slept ; and they did not wander so far from its 
precincts during the daytime, but that they could at any hour hear 
the trumpet-call, which, like the alarm-bell of modern times, might 
summon them back to the defence of the walls. Hence they culti- 
vated only a narrow territory, lying within sight of, or at a short 
distance from, the city; and to obtain food from this restricted 
space for their whole number, they were obliged to exhaust all the 
arts of cultivation upon it : it was tiUed, and it bloomed, like a 
garden. For greater security, a portion of it was generally en- 
closed within the fortifications. This pomosrium, or cultivated 
space under the walls, was usually divided into small strips, and 
allotted to the several heads of families among the citizens. A 
portion of the colonists devoted themselves to tillage, and raised 
food enough, or nearly enough, for the whole city. A larger por- 
tion within the walls applied themselves to the mechanic arts and 
to commerce, exchanging their manufactured goods for food, either 
with their own agricultural citizens, or with the native inhabitants 
of the soil, when they could open peaceful intercourse with them, 
or with the denizens of other shores, perhaps of the mother coun- 
try, to which they sent their ships. 

As they needed only a narrow strip of territory, which they 
often obtained by fair purchase from the aborigines, the hostility 
of the latter was not excited ; and the mutual benefits of trade 
being soon felt, the natives came to regard the colonists as their 
benefactors and best friends. A knowledge of the arts, a taste for 
the comforts and luxuries of life, learning and religion, were thus 
diffused among them ; and in their simplicity and gratitude, they 
often reverenced the authors of their civilization as superhuman 
beings, and paid them divine honors. Many, if not most, of the 
gods and goddesses of ancient mythology were originally only 
the founders of art-bringing, knowledge-and-religion-diffiising colo- 
nies, whose beneficent influence, handed down to grateful remem- 
brance by tradition, really seemed to admiring posterity divine. 
The colony, the city, was opulent and refined from the beginning ; 



THE CONCENTRATION OF THE PEOPLE. 81 

founded by the most enterpi'ising citizens of the mother country, 
who brought their wealth, their cultivated tastes, and their indus- 
trious and adventurous habits along with them, it became almost 
at once a rival of the parent city in learning, industry and the 
arts. Temples and theatres were built ; the drama flourished ; 
schools of eloquence were established ; man\ifactures of costly and 
elegant fabrics were begun ; and commerce started into life with 
all the vigor of youth and the large resources of manhood. 

Brief as this sketch is, the classical reader will recognize in it, 
I think, the principal features of those colonies which the Phoeni- 
cians established along the northern shore of Africa, the Greeks 
along the coasts of Asia Minor, Sicily, and Magna Grsecia or 
Southern Italy, and the Komans in Gaul and Spain.* Carthage, 
the great commercial and manufxcturing city of ancient times, the 
rival of Rome, may be taken in its history as a type of them all ; 
and in the fanciful picture which, many years after its destruction, 
the Roman poet drew of its supposed origin, of the scene which it 
presented while the walls of the city were building, we recognize 
what was the idea, even so late as Virgil's time, of the mode of 
founding a colony. 

Modern colonies, on the other hand, are, from the outset, de- 
pendencies of the mother country, to which they constantly look 
for protection and support. They are often planted by those who 

* " Their progress," says Mr. Grote, speaking of the Grecian colonies in Sicily, 
" was very great, and appears greater from being concentrated, as it was, in and 
around a few cities. Individual spreading and separation of residence were rai-e, 
nor did they consist eitlier with the security or tiie social feelings of a Grecian 
colonist. The city to which he belonged was the central point of his existence, 
where the produce which he raised was brought home to be stored or sold, and 
where alone his active life, political, domestic, religious, recreative, etc., was car- 
ried on. There were dispersed throughout the territory of the citj- small fortified 
places and garrisons, serving as temporary protection to the cultivators in case of 
sudden inroad; but there was no permanent residence for the free citizen except 
the town itself. This was, perhaps, even more the case in a colonial settlement 
where everything began and spread from one central point, than in Attica, where 
the separate villages had once nourished a population politically independent. It 
was in the town, therefore, that the aggregate increase of the colony palpably con- 
centrated itself, — property as well as population, — private comfort and luxury not 
less than public force and grandeur. Such growth and improvement was of course 
sustained by the cultivation of the territory, but the evidences of it were manifested 
in the town; and the large population which we sliall have occasion to notice as 
belonging to Agrigontum, Sybaris, and other cities, will illustrate this position." 
(Vol. III. p. 368^ Am. ed.) 
6 



82 THE ENCOURAGEMENT OF MANUFACTURES : 

do not intend to reside there permanently, but simply wish to 
gather again in a new country the wealth which they have dissi- 
pated in an old one, and then to return to their former home in 
order to enjoy it. Thus, relieved from all fear of attack from the 
aborigines, their first care is to get possession of as much land as 
possible, this being the most obvious and plentiful source of 
riches. Individuals or joint-stock companies obtain grants of 
land measured by the league ; and their rapacity provokes the 
vengeance of the natives, at the same time that it leads to their 
own isolation and defencelessness. The territory whi^h they 
■ acquire is out of all proportion to their wants, their physical 
strength, or their capital ; they cultivate only here and there a 
very fertile spot, where the powers of the soil are soon spent by a 
succession of exhausting crops ; and in the careless style of agri- 
culture to which they become accustomed, through their depend- 
ence on the extent and natural richness of their land, is soon lost 
all remembrance of the agricultural art and science which they 
brought with them from their old home. Widely separated from 
each other, amply supplied with food by the bounty of nature, but 
destitute of the manufactured articles on which depend the com- 
forts and even the decencies of life, out of the reach of the law, 
and beyond the sphere of education, they rapidly approximate the 
condition of the savages whom they have just dispossessed. They 
become "squatters," "bushmen," "backwoodsmen," whose only 
enjoyments are hunting and intoxication, whose only school-room is 
the forest, and whose sense of justice is manifested only in the 
processes of Lynch-law. They are doomed to the solitary, violent, 
brutal existence which destroys all true civilization, all sympathy 
with other men, though it increases strength of body, adroitness, 
courage, and the spirit of adventure. The want of local attach- 
ments, and an insatiable thirst for wandering and adventure, "are, 
I fear, the most striking traits in the character of the whole popu- 
lation of our Mississippi valley. The truant disposition which 
carried th^m over the Alleghanies hurries them onward to the 
Rocky Mountains. I do not fear that these constant migrations 
should lead our countrymen back to bai-barism ; but it is certain 
that the " pioneers of civilization," as thej'- have been fondly called, 
leave laws, education, and the arts, all the essential elements of 
civilization, behind them. They may ^ be the means of partially 



THE CONCENTRATION OF THE PEOPLE. 83 

civilizing others, but they are in great danger of brutalizing them- 
selves. 

Strangely enough, the only colony of modern times foimded on 
the principles which governed the ancients in the establishment of 
their colonies is one commenced by a set of half-crazed fanatics in 
our own far-distant territory of Utah. Here, as well as at their 
former place of settlement in Illinois, the Mormons appear to have 
begun their colony by founding a city, within or near which their 
whole population is to be collected, so that the mechanic arts 
and all branches of manufactvu'e may be established at the same 
time that they make their first attempts in agriculture. The 
name of their present chief city is New Hierusalem, situated on 
the right bank of the Western Jordan, which empties into their 
Dead Sea. 

" Its houses are spread," says Mr. Kane, " to command as much 
as possible the farms, which are laid out in wards or cantons, with 
a common fence to each ward. The farms in wheat already cover 
a space greater than the District of Columbia, over all of which 
they have completed the canals and other arrangements for boun- 
tiful irrigation, after the manner of the cultivators of the East. 
The houses are distributed over an area neai'ly as large as the 
city of New York. They will soon have completed a large com- 
mon stoi'ehouse and granary, and a great-sized public bath-house. 
One of the many wonderful thermal springs of the valley, a white 
sulplmr-water of the temperature of 102° Fahrenheit, with a head 
of ' the thickness of a man's body,' they have already brought into 
the town for this purpose." 

It is remarkable, that one of the latest improvements or dis- 
coveries in economical science, Mr. Wakefield's theory of coloniza- 
tion, consists in the recognition of the fact that the ancient mode 
of planting colonies is far preferable to the modern one. Mr. 
Wakefield perceived that a country cannot have a profitable 
agriculture unless it has a large town population, who may supply 
the agriculturists with manufactured articles, while the agricul- 
turists supply them with food. Both parties are thus furnished 
with a market for their surplus produce, and with the articles 
that they most need in exchange for it. Ho showed that the 
modem fashion of establishing new settlements, — " setting down 
a number of families side by side, each on its own piece of land, 



84 THE ENCOURAGEMENT OF MANUFACTUEES : 

and all employing themselves in exactly the same manner, — 
though, inider favorable circumstances, it may assure to those 
families a rude abimdance of mere necessaries, can never be other 
than unfavorable to great production or rapid growth." The 
situation of Oregon hardly ten years ago affords a striking illus- 
tration of this truth : the settlers, for want of a market, were 
obliged to feed their horses with the finest wheat, while their own 
dwellings were nearly destitute of all the comforts of life. Wake- 
field's " system consists of arrangements for securing that every col- 
ony shall have, from the first, a town population bearing due pro- 
portion to its agricultural, and that the cultivators of the soil shall 
not be so widely scattered as to be deprived by distance of the 
benefit of that town population as a market for their produce." 
When land was plenty and free immigrants scarce in New Hol- 
land, the government found it convenient to make liberal gifts of 
territory; and accordingly, tracts varying in size from 10,000 to 
60,000 acres were granted to various individuals. 

Mr. Wakefield, says one of his reviewers, argued thus : " The 
welfare of any community depends very much upon such a division 
of labor as shall fill every trade, profession, and employment with 
good men, and not overload any of them. If land in any country 
is so cheap that all are able to become landholders, there will be no 
laborers, no farm-hands, or mechanics ; a semi-barbarism will fol- 
low ; no growth in wealth or civilization will take place, and the 
country will be stationary or retrograde. If, therefore, you would 
have a colony progressive and civilized, you must put your lands 
so high as to keep a proper proportion of the inhabitants in the 
labor-market seeking employment, and yet not so high as to pre- 
vent as many from buying real estate as can use it to advantage 
with the help of such laborers. If, then, England wishes Australia 
to grow in riches and goodness, let her sell the lands at a fixed 
price, never taking less, and in fixed quantities, never selling less ; 
and let her apply the revenxie arising from these sales to the trans- 
portation of free, honest laborers to the points where they are need- 
ed. In this way, the labor' market of New Holland will be sup- 
plied ; the expense of supplying working hands will be paid by the 
lands of the colony ; no more land will be taken up than can be 
worked to advantage ; popixlation will be concentrated ; wealth wiU 
accumulate, and knowledge and virtue advance." 



DISPOSAL OF THE PUBLIC LANDS. 85 

Mr. Wakefield's theory was good, but a practical difficulty ob- 
structed its application. The government, adopting his views, put 
their lands up to a high price ; and the immigrants, consequently, 
instead of purchasing them, or of remaining as laborers on the 
lands purchased by others, pushed farther into the interior, and 
" squatted " on the best land they could find, without paying any- 
thing. In those vast unsettled regions, they knew very well that 
they were out of reach of the sheriff. Thus, the very measures 
adopted for concentrating them, and keeping them within the 
range of civilization and law, led to their wider dispersion and 
"t'ter ! .'.,," .'ssneibS. 

It is .;urious that the United States sj'Stem of d'«p':>si.no: of the 
public j'ands, adopted in all its essential features as far back a.-* 
1800, has worked better than any other plan which has yei betiv 
devised. The land is carefully divided by the government surveys 
into townships six miles square, each of these being subdivided into 
thirty-six sections, of one square mile, or 640 acres, each. All is 
held at a minimum price of $ 1.25 an acre ; and the sales are made 
at public auction, as rapidly as the progress of the population 
seems to require. Lands which will not bring $ 1.25 an acre at 
the public sale are still held by the government subject to entry 
at any future time, at private sale and at the minimum price. 
Any person can select a quarter, or even an eighth section, — 160 
or 80 acres, — wherever he can find one surveyed and not yet sold, 
and, by making a record of his intention to occupy and settle it 
himself, he can secure what is called the "pre-emption right"; — 
that is, a privilege of purchasing that land at the minimum price 
of $ 1.25 an acre, whenever the government shall think proper to 
sell it, which it will do when the settlement is so far advanced as 
to render it probable that most of the land in the vicinity will 
bring that price. Thus the actual settler in truth obtains his 
land on credit, though all actual sales are for cash. He has credit 
till the actual sale is ordered ; and some years may intervene, dur- 
ing which he may proceed to clear and cultivate his land, and 
actually obtain enough from it to make up its price, — secure that 
no one will overbid him, and that he cannot be obliged to pay 
more than $ 1.25 an acre for it, however great maybe his improve- 
ments. Five per cent is reserved from the proceeds of the sales, 
to be expended, three fifths for making roads in the newly settled 



83 - THE ENCOUEAGEMENT OF MANUFACTURES: 

territory, and two fifths for the support of schools and colleges 
therein. 

In still another way the sale of the public lands is made to help 
in opening new means of communication between the diffei'ent por- 
tions of recently settled territory, and in giving the people access 
to distant markets. By special statutes, companies constructing 
new railroads often receive a free gift of one half of the sections of 
land, taken alternately, that border upon the line of the proposed 
road ; and as these sections command a much enhanced price on 
account of their nearness to the new artery of travel and traffic, 
the sale of them usually defrays in great part the coau,;^.']_^""i'l<l- 
ing the rajlroad, At-the^ame^tinjii, this gift costs the government 
nothing, for the price of the alternate sections which are reserved 
is then doubled, and they are quickly sold at this advanced rate, 
for the new road has more than doubled their value. 

I say this system has worked well, the only evil experienced 
under it being, that speculators will sometimes buy up large tracts 
not subject to pre-emption right, at the minimiim government 
price, and hold them for an indefinite period, hoping that, as the 
population gradually closes up and concentrates around them, they 
may again be brought into market at a much advanced price. 
While thus held, they remain unoccupied, — broad patches of wil- 
derness among the settlements, — obstructing communication be- 
tween the surrounding lands, and barring out occupation and im- 
provement. But there is a check to this evil in the fact that such 
lands are subject to State taxation, though they are tax-free before 
they are sold by the United States ; and the taxes being propor- 
tioned to the rise in value of the property, it is not for the interest 
of the speculators to retain the laud a long time. 

But the inhabitants of the Western States make a great mis- 
take when they clamor for a reduction of the minimum price at 
which the public lands are now held, and even demand that they 
shall be offered, in limited quantities, as a free gift to actual set- 
tlers. Their object, of course, in making these demands, is to 
stimulate the spirit of emigration to the West, so that the popula- 
tion there may more speedily become dense, and the value of the 
lands already settled thus be enhanced. The object is a good one ; 
but if there is any force in the considerations now adduced, the 
means adopted will rather check than promote its attainment. It 



DISPOSAL OF THE PUBLIC LANDS. 87 

is surely not for the interest of sparsely settled States, like In- 
diana, Illinois, and Michigan, that the great wave of emigration, 
though broadened and deepened, should only roll over them, to be 
arrested at last by the farthest limits of Iowa and Miiniesota, or 
perhaps to pass much farther. Any great reduction in the price of 
the public lands will surely have this effect. The most eligible 
land in the three States first mentioned has already been taken up 
by individuals, that portion which yet remains in the hands of 
government being either less fertile, or more distant from naviga- 
ble streams and other means of communication, or situated in a 
less salubrious or convenient region, than the tracts first selected 
for purchase. They have long been in the market, and have not 
yet found a buyer. Even now, most of the emigrants pass by 
them, seeking public lands which are more remote from their former 
homes. Any general reduction of the government price could not 
affect this relative eligibility of the nearer and more distant lands. 
Reduce the price to nothing, — give away the lands altogether, — 
and the emigrant will still pass on, pushed forward by his fond 
illusion, that the fai'ther from home, the nearer to El Dorado. 

Again, what is most needed for an increase of the prosperity of 
the West — of that portion of it, at least, which lies near the 
Mississippi — is, not that the lands yet in the possession of gov- 
ernment should become private property, but that the popidation 
should be concentrated on the tracts already owned by individuals, 
though in gi'eat part still covered by the primeval forest. To en- 
hance the value of these broad regions, the people must be massed 
together, towns and cities must be established, manufacturing and 
commercial industry must be added to agricultural, and the hut 
of the backwoodsman give place to the well-farnished abode of 
civilized man. It is an ill mode of enhancing the value of the 
fixrms of individuals, to offier lands in their immediate vicinity at a 
nominal price, or at no price at all. The passion for owning land, 
which converts nearly all the new settlers in our Western States 
into farmers, however ill-fitted for such occupation by their pre- 
vious pursuits, is as injurious to agriculture as to the other great 
branches of industry. The land is held by those who, from 
defect of experience or want of capital, are unable to develop its 
resources, or even to remove the forest from a tithe of their do- 
mains. Corn, fuel, and meat are abundant, because prodigal na- 



88 THE ENCOURAGEMENT OF MANUFACTUEES : 

ture affords so many facilities for the production of them, that the 
skill, enterprise, and knowledge of the cultivator are little needed, 
and are therefore imperfectly called forth. But man does not live 
by bread alone ; and when this alone is supplied, almost without 
labor and without stint, he learns to do without many of the requi- 
sites even of a low stage of civilization, and allows the wants of his 
higher nature to remain unsatisfied. The want of a market, and 
the consequent surplus of agricultural produce, reduce its price 
so low that many families find it useless to raise more than is 
wanted for their own consumption. 

Again, the agriculturist has usually but one or two staple arti- 
cles — perhaps wheat alone, or cotton alone, or hemp alone — 
which he can send to a distance and sell to foreigners. These 
alone are capable of transportation to a distance. But his farm 
cannot usually be worked to advantage unless he has a market in 
his immediate neighborhood, at which he can dispose of his green 
crops, market vegetables, butcher's-meat, and other articles, which 
must be sold on the spot, or not at all. He needs this neighbor- 
ing market, also in order that he may purchase conveniently, and 
at the lowest price, his ploughs, spades, carts, and other farming- 
tools. How is he benefited, then, — though we were to grant that 
he could exchange his wheat for cloth to better advantage by 
trading with foreigners than with his own countrymen, if he should 
thereby prevent a manufacturing market town from springing up 
within a few miles of his farm, and thus altogether lose the sale 
of many of his products, and be compelled to piirchase his tools at 
a much higher price, or be put to great inconvenience in obtaining 
them on any terms 1 

The difficulty is felt, though its true cause is not ascertained ; 
and a general call is made for improving the means of communi- 
cation, so as to give access to distant markets, when the real want 
is that of a market near home. The State too often bankrupts 
itself in the gigantic enterprise of creating a system of railroads 
and canals, so as to gain access to a manufacturing and commer- 
cial population on the other side of the Alleghanies, instead of 
laboring to create such a population within its own territory. 
Indiana and Illinois, whose united territory measures about ninety 
thousand square miles, and whose inhabitants, in 1860, numbered 
over three millions, had but one city — Chicago — which contained 



THE CONCENTRATION OF THE PEOPLE. 89 

over one hundred thousand inhabitants, and but three others — 
Indianapolis, Peoria, and Quincy — having more than twelve thou- 
sand. Has it been a benefit to these States, that the cheapness 
of the public lands has recently borne the tide of emigration on- 
ward into Kansas and Nebraska, instead of its being arrested by 
the left bank of the Mississippi 1 In our opinion, the interests of 
these States, and of the emigrants themselves, would be most ef- 
fectually promoted by raising the price of the public lands to a point 
which would really keep them out of the market for twenty years 
to come. 

It is remarked by an intelligent English traveller, that " the 
wheat-exporting regions of North America have been gradually 
shifting their locality, and retiring inland and tow-ards the West." 
During the middle and latter part of the last century, the banks 
of the Hudson and the Delaware, and the flats of the lower St. 
Lawrence, were the granary of America ; the western part of New 
York, especially the Genesee country, succeeded these ; then 
came Ohio and Canada West ; and now, a large portion of the sur- 
plus wheat, destined for exportation to Europe, is drawn from 
Michigan, Wisconsin, Iowa, and Minnesota. The reasons for this 
change ai-e to be found, partly in the migratory disposition of 
the people, and partly in their imperfect and exhausting processes 
of agriculture. The influx of population into the neighborhood 
causes the lands to rise so rapidly in value, that the deterioration 
of the soil, mider too constant and exhausting crops, becomes com- 
paratively of little moment. Little attention is therefore paid to 
manuring, or to establishing a due rotation of crops. Only the 
cheapest system of husbandry, and that productive of the quickest 
returns, w^ithout regard to the effects produced by such tillage in 
the long run upon the inherent fertility of the ground, can enable 
the former to maintain competition in the market with the sup- 
plies poured in from the newly opened wheat-regions farther west, 
where the land has been obtained at a nominal price, and its virgin 
powers seem inexhaustible. 

Tired of a contest in which he is subject to a constantly increas- 
ing disadvantage, the New York farmer at last sells his farm, and 
himself migrates westward, secure of obtaining a larger and more 
fertile tract of land at a low cost. But in Kansas or Nebraska, he 
soon finds that he has only bartered one disadvantage for many. 



90 THE DESIRE OF ACCUMULATION : 

The cost of transporting his wheat to market is now so great that 
the price on the ground hardly pays the expenses of cultivation. 
Labor is dear, and difficult to be had at any price, as few will work 
for wages when they can obtain farms for themselves at a nominal 
price and on long credit. The emigrants of a later day, instead 
of settling down and completing the half-formed village, push 
on and begin rival settlements farther still in the interior. 
Then competition begins anew, and the old contest with les- 
sening prices and increasing expenses of cultivation must be 
renewed. 

The great evil in the Old World, especially among commercial 
and manufacturing nations, arises from the undue concentration of 
the people in cities, the improvements in the implements and pro- 
cesses of agriculture requiring every year a smaller and smaller 
number of laborers for the tillage of the fields. In Western Amer- 
ica, the difficulty is of just the opposite character ; the population is 
thinly dispersed, cities are found only at great distances from each 
other, and the processes of agriculture, as well as of most of the 
arts of life, tend to deterioration rather than improvement. 



CHAPTER VI. 

THE INCREASE OP CAPITAL AS AFFECTED BY THE ADVANTAGES HELD 
' OUT TO THJE POSSESSORS OP WEALTH : INJURIOUS EFFECTS OP 
CASTE, OR THE FIXITY OF RANKS AND CLASSES. 

The next stimulus of labor and frugality which we have to con- 
sider is, the prospect that the savings when made, or the capital 
when accumulated, will be attended with a high rate of profit, and 
by a large proportion of physical comfort, social consideration, and 
political influence. 

Necessity is the first and most effective spur to exertion. We 
have wants that must be satisfied : we must eat and drink, or we 
perish. But observe that labor or exertion tends only to the pro- 
duction of wealth, and that our natural desires urge us to consume 
the product just as soon as it is created. For the acctimulation of 
capital, or the growth of national opulence, we must be willing, not 



CAUSES OF IMPROVIDENCE. 91 

only to work, but to save. Now, the greatest of all encourage- 
ments to frugality is the sure prospect that our savings will con- 
tribute largely to our comfort, will elevate our position in society, 
and add to the estimation in which we are held in the community 
and to the power which we actually wield. No man will practise 
self-denial for nothing ; take away the chance of using his accumu- 
lations to advantage, and every one, to use the popular phrase, will 
spend as he goes. It is not enough to prove to the laborer that 
what he does not spend to-day he will be able to spend to-morrow. 
There is some hazard, at least, that he may lose it before the mor- 
row comes ; and if an equal amount of enjoyment can be had with 
it now, he will be apt to secure that enjoyment as soon as possible. 
But when he sees that the enjoyment, if postponed, may be con- 
siderably increased, he wuU be anxious to save ; and this anxiety 
will be gi-eater in proportion to the probable rate of increase, and 
to the comforts and immunities which the use of the accumulation 
may bring. The greater the consideration and influence which at- 
tend the possession of wealth, the greater will be the temptation to 
amass wealth. 

What has been called " the effective desire of accumulation," 
says Mr. Mill, " is of unequal strength, not only according to the 
varieties of individual chai'acter, but to the general state of society 
and civilization." " All circumstances, which increase the proba- 
bility of the provision we make for futurity being enjoyed by our- 
selves or others, tend to give strength to the effective desire of 
accumulation. Thus, a healthy climate or occupation, by increas- 
ing the probability of life, has a tendency to add to this desire. 
Wheu engaged in safe occupations, and living in healthy countries, 
men are much more apt to be frugal, than in unhealthy or hazard- 
ous occupations, and in climates pernicious to hiiman life. Sailors 
and soldiers are prodigals. In the West Indies, New Orleans, the 
East Indies, the expenditure of the inhabitants is profuse. War 
and pestilence have always waste and luxury among the evils that 
follow in their train." 

Improvidence may also proceed from intellectual as well as 
moral causes. " Individuals and communities of a very low state 
of intelligence," says Mr. Mill, " are always improvident. A cer- 
tain measure of intellectual development seems necessary to enable 
absent things, and especially things future, to act with any force 



92 THE DESIKE OF ACCUMULATION: 

on the imagination and will. The effect of want of interest in 
others in diminishing accumulation will be admitted, if we con- 
sider how mach saving at present takes place which has for its 
object the interest of others rather than of ourselves ; — the 
education of children, their advancement in life, the future in- 
terests of other personal connections, the desire of promoting, 
by the bestowal of money or time, objects of public or private 
usefulness. If mankind generally were in the state of mind to 
which some approach was seen in the declining period of the Ro- 
man empire, — caring nothing for their heirs, as well as nothing 
for their friends, the public, or any object which survived them, 
— they would seldom deny themselves any indulgence for the 
sake of saving, beyond what was necessary for their own future 
years ; which they would place in life annuities, or some other 
form which would make its existence and their lives terminate 
together." 

The various stages of civilization depend upon, or are the con- 
sequence of, the varying strength of this desire of accumulation. 
The remnants of Indian tribes which are found in villages upon 
the banks of the lower St. Lawrence are surrounded by circum- 
stances which ought to secure to them all the comforts of life, and 
which would enable others to amass wealth. They have abun- 
dance of fertile land, already cleared from the forest, and manure 
in heaps lies beside their huts. Yet such are their apathy and 
improvidence that they often suffer extreme want ; and from the 
privations thus endured, with occasional intemperance, their num- 
ber is rapidly diminishing. Yet their apathy does not arise from 
aversion to labor ; for they are industrious enoi;gh when the 
reward of toil is immediate. They are successful in hunting and 
fishing, and they work with ardor when employed as boatmen on 
the St. Lawrence. They will even till the ground, if the returns 
from such labor are speedy and large ; they will raise Indian corn, 
which grows and ripens quickly in Canada, and yields perhaps a 
hundred-fold. But they have not foresight enough to fence their 
fields, and hence, when the situation is exposed to the incursions 
of cattle, the culture is abandoned. 

Nearly as low, in respect to foresight and prudence, are the 
emancipated negroes of Hayti and the British West Indies. In 
a tropical climate, where little clothing or shelter is needed, and 



CAUSES OF IMPROVIDENCE. 93 

w^here the ground is so fertile that the labor of a few weeks will 
Bupply sustenance for a year, they are content to gain little more 
than the necessaries of a merely animal existence. The ease with 
which life is supported fosters indolence, feebleness, gayety, and 
insouciance ; and even when the people pretend to labor, their work 
is scarcely worth paying for. " In the sugar-mills," we are told, 
" from twenty to thirty men and women are employed to do what 
five American operatives would do much better in the same time 
with the aid of such labor-saving agencies as would suggest them- 
selves at once to an intelligent mind " ; and " this is but one of 
the thousand ways in which labor is squandered on this island." 
The people might supply themselves with all the luxuries of the 
earth ; but they are content to live in a swinish abundance of the 
grossest necessaries, — to be fat and shining, and to sing, chatter, 
and bask in the sun. 

Again, accumulation is rapid when the rate of profits is large. 
Tf this rate is so high that the accumulated savings of a few years 
may be made to produce an income equal to that from which those 
savings were made, then the prospect of being released altogether 
from the necessity of labor will stimulate the habit of frugality to 
the utmost. The average rate of profits in this countr}^ is at least 
twice as large as in Great Britain ; for the interest of money here 
averages over six per cent, while the English Government funds 
yield but three per cent, and the ordinary rate for short loans often 
falls below that point. But the rate of profits on capital consider- 
ably exceeds the rate of interest on money ; for he who borrows 
capital undertakes the risk and care of employing it to advantage; 
and, of course, he who lends his capital, because unwilling to take 
that risk and care on himself, will not expect so high a rate for it 
as he might obtain by using it himself When a great deal can be 
made by the use of money, a great deal will be given for the use of 
it ; but still not so much but that something shall remain to com- 
pensate one for the skill and industry that are required to use it to 
advantage. The average rate of profits in this country may be es- 
timated at twelve per cent a year, while the corresponding rate ia 
England is but six per cent. In this country, then, by postponing 
the period of consumption or enjoyment for a little over six years, 
the amount of that enjoyment may be doubled. In England, in or- 
der to double the enjoyment, abstinence must be practised for twelve 



04 THE DESIRE OF ACCUMULATION : 

years. It is obvious, then, that where there is the most need of 
capital, the temptation to accumulate it is strongest, — the rate 
of profits being high, — and its growth is most rapid. 

In Holland, nearly two centuries ago, after a period of almost 
unequalled commercial prosperity, the rate of interest fell to about 
two per cent, the rate of profits suffered a corresponding reduction, 
and, as a necessary consequence, the growth of capital almost 
wholly ceased. Holland, in point of commercial and manufacturing 
enterprise, has been in a stationary, if not a declining state, for 
about two centuries. The springs of industry are not relaxed, for 
the people are still sober and laborious ; but they lack the energy 
and the thirst for gain, which caused them, in the seventeenth cen- 
tury, to dot the surface of the globe all over with Dutch colonies 
Few will practise abstinence and try to amass wealth when the 
rate of profit is but little over four per cent. 

The TBibe of interest in England, in Henry VIII. 's time, was 
limited to ten per cent, which implies that it had been higher. 
Under James I. it was reduced to eight, and after the Restoration 
of the Stuarts, to six per cent. Forty years afterwards, it was 
again reduced to five, and a continuance of the same causes, as we 
have seen, has now brought it down to three per cent. But for 
the enlarged intercourse with foreign lands, which has tempted Eng- 
lish capitalists of late years to embark their funds in enterprises 
abroad, — in Mexican mines, in Continental and American railroads, 
in Austrian and Russian funds, and in United States stocks, — it is 
probable that the interest of money and the profits of stock would, 
ere now, have sunk to that low point at which the desire to accu- 
mulate ceases altogether. 

True, " there would be adequate motives for a certain amount 
of saving," as Mr. Mill remarks, " even if capital yielded no profit. 
There would be an inducement to lay by in good times a provision 
for bad ; to reserve something for sickness and infirmity, or as a 
means of leisure and independence in the latter part of life, or a 
help to children in the outset of it. Savings, however, which have 
only these ends in view have not much tendency to increase the 
amount of capital already in existence. These motives only prompt 
each person to save at one period of life what he purposes to con- 
sume at another, or what will be consumed by his children before 
they can completely provide for themselves." " There are always 



THE AGGREGATION OF SMALL SAVINGS. 95 

some persons in whom the effective desire of accumulation is above 
the average, and to whom less than the ordinary minimum rate of 
profit is a sufficient inducement to save ; but these merely step 
into the place of others whose taste for expense and indulgence is 
beyond the average, and who, instead of saving, perhaps even dis- 
sipate what they have received." 

The hope of elevating one's condition in the world tends more 
effectually to increase the national wealth in proportion as it 
affects a larger number of the people. In most civilized countries, 
the bulk of the population are poor, their daily wages hardly suf- 
ficing to buy their daily bread. Their savings, if it is possible for 
them to make any, must be in very small sums ; and the induce- 
ment for them to be frugal must depend on the possibility of 
immediately investing such small sums to advantage. One of the 
great improvements of modern civilization consists in the means 
afforded, the machinery contrived, for collecting these driblets of 
wealth, and bringing them together into large reservoirs, whence 
they issue in abundant streams, giving efficiency and fertility to 
labor throughout the land. The water which falls in drops upon 
the desert sinks through the sand, and leaves the ground arid and 
barren as before ; but when collected in great tanks and cisterns 
it turns some portion of that desert into a garden. A century 
or two ago, if the laboring part of the population made any sav- 
ings, they were in the form of little hoards of silver or gold, hid in 
an old stocking, or buried in the garden. But because the money 
thus stored was unproductive, and yielded no interest, and because 
it was always at hand when the owner was for a moment tempted 
to some indulgence and consequent expense, the number and 
amount of such hoards were always small. Now, through the 
multiplication of the branches of retail trade and the lesser me- 
chanic arts, and through joint-stock corporations and savings' 
banks, the first half-eagle which the laboring man or woman saves 
from the month's wages is, profitably invested, and, by the end of 
the year, is increased by the twentieth part of itself When this 
saving has reached a very moderate amount, it can be made to 
accumulate at compound interest, and thus to double itself in 
twelve years. In many cases, it soon comes to be used by the 
owner himself as capital ; that is, it is invested in the purchase of 
tools or machinery, or a small stock in trade; and it may then 



96 THE DESIRE OF ACCUMULATION. 

accumulate at the rate of ten or twelve per cent a year, — that 
is, it may double itself every six or seven years. The result is, 
that he who began life as a common laborer often drives about in 
his own carriage before its close. 

In almost any other part of the world than New England, I 
should be afraid to give this sketch as an illustration of the manner 
in which the wealth or available capital of a nation is increased. 
But I presume it is a safe assertion, that at least one half of 
those who are usually called wealthy men, in Boston and its 
neighborhood, have obtained their wealth very nearly in the man- 
ner, or through the process, just described. This leads us to 
perceive that the aggregate of the small savings made by the 
bulk of the population, who have very small means, may constitute, 
and in this country actually does constitute, a larger annual addi- 
tion to the whole amount of national capital, than the sum of the 
much larger savings made by the few who are usually considered 
as capitalists. The customs of society in England require the 
style and expensiveness of living to come much nearer to the indi- 
vidual's whole income than is usual in this country, so that most 
of the nobility and the landed gentry, who have the largest in- 
comes, do not make any savings at all, and many even run in 
debt, or encroach upon their capital. A nobleman who inherits 
an estate of £ 20,000 a year, inherits also a style of living which 
is costly enough to consume it. In the United States, on the 
other hand, a man usually begins poor, and therefore with frugal 
habits, and consequently hardly knows what to do with the income 
of a large property when he has acquired it. He has no ancestral 
castle to maintain in due state, and no county to contest at each 
succeeding election. Nay, the custom of the country, the force 
of public opinion, is such, that he cannot make his personal expen- 
diture equal to his income, even if he wished. He must not keep 
a carriage and four, nor have a footman to stand behind his more 
modest equipage, nor clothe his servants in livery, nor adopt many 
others of the badges by which some persons try to convince the 
world that they are people of consequence. We are accused of 
being fond of titles, it is true ; but the epithets of Major, Colonel, 
and Honorable cost nothing but civility, and so do not help a man 
to spend his fortune. We do not tolerate gold lace, nor cocked 
hats, nor tall footmen with gold-headed canes. 



ADVANTAGES OF THE POSSESSION OF WEALTH. 97 

We come now to the inquiry, Under what circumstances are the 
middle and lower classes able to save, and by what means is their 
inclination to frugality most effectually stimulated] I answer, 
that the most powerful means to this end is what may be called 
the mobility of society, or the ease and frequency with which the 
members of it change their respective social positions. The worst 
of all forms of civil polity is that which binds a man forever to 
the condition of life in which he was born, be it of high or low 
degree, however he may have merited removal from it by his 
character, acquisitions, and behavior. Fixity of ranks and classes, 
or the existence of immimities and distinctions which money and 
talent can neither procure nor remove, is a bar to the accumula- 
tion of wealth, — a bar the difficulty of overleaping which is pro- 
portioned to the importance and extent of those unpurchasable priv- 
ileges. If the}^ are numerous and of great moment, if they cover 
the whole ground both of political influence and social consider- 
ation, what inducement is there for any one who is not born to the 
possession of them, either to labor or to save further than is re- 
quired for the necessities of the present hour? Only after pro- 
viding for these necessities does the accumulation of capital begin. 
And what inducement to accumulate is there for one who is born 
to the possession of them, since he already enjoys more than 
wealth can buy, and cannot forfeit this enjoyment even if he 
should lose his wealth % The great improvement in the industrial 
organization of society in modern times, whereby the increase 
of wealth in all civilized nations has been made so rapid and so 
great, has been the successive breaking down and removal of these 
fixed and arbitrary barriers and divisions, so as to leave the whole 
field of promotion open to the career of skill, industry, and econo- 
my. A brief notice of a few points in the politico-economical his- 
tory of different nations will illustrate this statement. 

" Both in ancient Egypt and Hindostan " — and to a great extent 
still in the latter of these two countries — " the whole body of the 
people was divided into different castes or tribes, each of which 
was confined, from father to son, to a particular employment or 
class of employments. The son of a priest was necessarily a priest; 
the son of a soldier, a soldier ; the son of a laborer, a laborer ; the 
son of a weaver, a weaver, etc. In both countries the caste of the 
priests held the highest rank, and that of the soldiers the next; 
7 



98 INJURIOUS EFFECTS OF CASTE. 

and in both countries the caste of the farmers and laborers was 
superior to the castes of the merchants and the manufacturers." 
Adam Smith adduces these facts to explain why agriculture 
flourished in those regions far more than any other employment. 
He might with greater propriety have cited them to explain the 
peculiar, immovable, statue-like character of Hindoo and Egj'ptian 
civilization. The massive granite sphinxes, half covered by the 
sands of the desert among which they have rested for moi'e than 
three thousand years, with their enigmatical and almost super- 
human expression of mingled sweetness and severity, — fit emblems 
of mystery, unchangeableness, and everlasting repose, — aptly typ- 
ify the character and the institutions of the people who chiselled 
them. The bodies of this people are even now drawn from the 
tombs in which they have lain for thirty centuries, perfect in every 
limb and lineament, as if they resisted change even after death. 
And such was their condition during life : the idea of movement, 
alteration, or progress seems never to have occurred to them. 

Institutions merely political, the will of a monarch or the de- 
crees of a senate, could not retain society in this immovable state 
for ages. The power of religion was brought in, to render sacred 
the fetters which bound it, and to take away from the minds of 
the common people any desire to rupture them. How much in- 
fluence superstition had in building up these divisions of castes, 
and preserving them from violation or decay, may be conjectured 
from the fact that the priests always formed the highest caste, and 
therefore profited most by this peculiar institution. Civilization 
thus embalmed and immured was safe both from progress and decay 
by internal causes. It might have remained to this day just as it 
was in the time of the Pharaohs, if invasion from abroad had not 
brought it to a violent death, — if the Romans and the Arabs had 
not successively made Egypt a prey to their thirst for foreign 
dominion. 

Though the barriers of caste prevented the people, as indi- 
viduals, fi:-om making any progress in wealth, their peculiar polity 
enabled the government to undertake and execute works which 
shame the magnificence and expensiveness of modern productions. 
What we now esteem the wonders of Egypt, her obelisks and 
pyramids, her excavations and temples, were strictly public works, 
performed at royal or priestly command by the multitude, who 



INJURIOUS EFFECTS OF CASTE. 99 

worked without pay, because labor was the function of their caste, 
and the part which they believed the gods designed to be their 
vocation. Wages and profits were words which in their ears had 
no meaning ; all their time, all their labor, was due to the state, 
which was repi'esented by the monarch and the priests. A portion 
of their time or of the products of their labor was granted back to 
them, which might, or might not, suffice for their subsistence. If 
savings were ever made, it was only with the intention of obtain- 
ing enlarged enjoyment from them at a futui'e day, never for the 
purpose of aiding the individual's subsequent labors with a reserved 
fund, or of purchasing an easier or more elevated position with 
them. In the station of life in which each person was born, in 
that he was content to die. Of course, there was no accumulation 
of private wealth. Even the land belonged to the sovei-eign ; all 
that was due to any person was a livelihood in the profession or 
caste to which he belonged, with that measure and kind of employ- 
ment and comfort, of luxury or privation, which was allotted to 
every other member of the same caste. Immobility was the 
great characteristic of Hindoo and Egyptian civilization. 

The freer spirit and quicker intellect of the Greeks, the pride 
and military ambition of the Romans, prevented these nations 
from sinking into apathy, or stagnating in castes. In the fierce 
democracy of Athens, the subtle politician and fluent declaimer 
often elbowed his way into the favor of his fellow-citizens, and 
consequently into offices of honor and profit. At Rome, a man of 
plebeian origin not unft-equently vanquished the pride of the patri- 
cians, and obtained the consulship, or the command of the armies 
of the republic. There was freedom, there was life, in a society 
thus constituted. There was a path open to effijrt, and a motive 
for the exercise of industry and self-denial. In the turbulent 
times which preceded and accompanied the fall of the republic, 
individuals often amassed large fortunes, and with these pur- 
chased the honors which they had not political sagacity, or mili- 
tary skill and courage, enough to obtain by more honorable means. 
One of the triumvirs who shared the empire of the world with 
Antony and Octavius owed his political power solely to his wealth. 
Both these nations might have made far greater progress in opu- 
lence if the institution of slavery, itself a caste, had not existed 
among them, and if the state, and the affiiirs of government, had 



100 ADVANTAGES OF THE POSSESSION OF WEALTH. 

not monopolized ambition and effort to so great an extent that 
private enterprise, and the undertakings of individuals who did 
not avowedly look to the commonwealth for their reward, were 
discouraged or held in light esteem. Both at Athens and at 
Rome, the republic was everything and the individual was noth- 
ing ; and, as a consequence, in the city proper, society was com- 
posed of two great castes, — the citizens, who were devoted to 
public affairs, and the slaves. The wealth of Rome was the wealth 
of the robber's den, obtained by plundering the rest of mankind. 
Even the populace of this great city were supported by gratuitous 
distributions of the com which was levied as a tribute from the 
industry of the Sicilians and the Africans ; and its patricians 
amassed their enormous fortunes from the plunder of the provinces 
which they had been appointed to govern. 

With regard to slavery among the ancients, it has been acutely 
remarked by Sismondi, that because it was only an accident of 
the right of war, and not an industrial organization, it did not 
discredit labor in general. The slave was not a mere article of 
property, or a means, through his enforced toil, of increasing his 
master's wealth. He was rather a token of his owner's, or of 
the nation's, prowess in war. The possession of numerous slaves 
was more a matter of pride, a means of ostentation and magnifi- 
cence, than a mode of investing capital with a view to profitable 
returns. Few of the slaves were distinguished by color, or any 
other physical peculiarity, which might serve as an ineffaceable 
mark of bondage or degradation. Hence, when manumitted, they 
at once took rank in society, and their children often rose to high 
honors in the state. As slaves, indeed, they were often' put to 
servile and economical uses ; but they were never treated as mere 
machines for the production of wealth. They did not perform all 
the labor, and therefore they did not discredit labor. They were 
a caste, and so did not accumulate property, either for themselves 
or others ; but they were not a degraded caste ; they were not 
considered vile, as were the Pariahs in India, or as African slaves 
are, in modern times. 

" All the farms," says Varro, " are cultivated by freemen, or by 
slaves, or by a mixture of these two classes. Freemen till the 
gronnd, either by themselves, with the aid of their children, as 
the small proprietors do ; or by free laborers hired by the day, in 



INJURIOUS EFFECTS OF CASTE. 101 

the busy season, when they are making hay or collecting the grapes; 
or, finally, by those who are working out the payment of a debt. 
I speak of all farms in general, as it is more profitable to cultivate 
the unhealthy districts with hired laborers than with slaves ; and 
even in the healthy localities, the great labors of the husbandmen, 
such as the collection of the fruits, the harvest, and the vintage, 
ought to be confided to free hired workmen, or mercenaries." Those 
who belonged to a caste, as the slaves did, and who, consequently, 
were not stimulated to labor by the hope of rising or the fear of 
falling in the world, could not be trusted with the most important 
work, even on a farm. Modern experience fully confirms this re- 
sult, as no kind of cultivation is found to succeed if conducted by 
slaves, except that of tropical products, where the laborers can be 
employed in gangs. 

After the fall of the Roman empire in the West, and the estab- 
lishment of various tribes of barbarian conquerors upon its ruins, 
a great step was taken in social economy by the virtual emancipa- 
tion of one large class in the community from the fetters of caste. 
I refer to the inhabitants of the Free Cities or towns, the foundation 
of which, in Germany, France, and Italy, was the fii'st step towards 
the creation of the social polity of modern times. Their population, 
indeed, says Adam Smith, "consisted of a very difFei-ent order of 
people from the first inhabitants of the ancient republics of Greece 
and Italy. They were chiefly tradesmen and mechanics, who seem 
in those days to have been of servile, or very nearly of servile, con- 
dition. They seem, indeed, to have been a very poor, mean set of 
people, who used to travel about with their goods from place to 
place, and from fair to fair, like the hawkers and pedlers of mod- 
ern times." They were liable, while thus travelling about, to 
great exactions ; they were either plundered without mercy by 
the arrogant and rapacious, or they paid heavy taxes and tolls as 
a price of protection. " Sometimes the king, sometimes a great 
lord, would grant to particular traders, especially to such as lived 
on their own lands, a general exemption from such taxes ; and 
then, though in other respects nearly servile in their condition, 
they were called free traders." 

When thus chai'tered, they were allowed to give away their own 
daughters in man-iage, their children were permitted to inherit 
their property, and they could dispose of their effects by will ; in 



102 ADVANTAGES OF THE POSSESSION OF WEALTH. 

short, they were released from the most oppressive of the feudal 
burdens, to which, as of the lower class in society, they had pre- 
viously been subject. " They were, generally, at the same time 
erected into a commonalty, or corporation, with the privilege of 
having magistrates and a town-council of their own, of making by- 
laws for their own government, of building walls for their defence, 
and of reducing all their inhabitants to military discipline by 
obliging them to watch and ward." The nobles despised the 
burghers, or citizens, whom they regarded as a parcel of emanci- 
pated slaves, devoted to base mechanic arts, and whose wealth 
excited their envy and indignation. The king, on the other hand, 
favored them, as a counterbalance to the power of the nobility, 
whom they hated and feared ; and the weakest monarchs, conse- 
quently, were most liberal in their grants of privileges to the cities 
and towns. Thus the prosperous cities of France and the Low 
Countries, the famous Hanse towns of Germany, and the flourish- 
ing commercial republics of Italy and Switzerland came into 
being. 

In the country, the distinctions of caste and the consequent 
limitations of employment still existed. The great barons lived 
remotely from each other, each on his own estate, surrounded by 
his retainers and serfs, whose only occupations were war and ag- 
riculture, and who had no hope of improving their condition. 
Exposed to every sort of violence, they naturally contented them- 
selves with a bare subsistence ; for to accumulate more would only 
excite the rapacity of their oppressors. If one of them did make 
some small savings, he hoarded them with care and secrecy, till he 
could find some opportunity of running away to a town, where, if 
he could conceal himself for a year, he was free forever. Thus a 
city often grew up to great wealth and splendor, while the country 
in its neighborhood was in poverty and wretchedness. The great 
lords themselves could obtain the articles of luxury which they 
desired only by bartering raw agricultural produce for them, at a 
great disadvantage, with the inhabitants of the towns. As the 
wealth and military strength of these municipal corporations in- 
creased, they could no longer be taxed but by their own consent ; 
hence they were empowered to send delegates to parliament or the 
general assembly of the states of the kingdom, where, in connec- 
tion with the clergy and the nobles, they granted extraordinary 



INJURIOUS EFFECTS OF CASTE. 103 

aids to the king, and had a potential voice in managing the affairs 
of the nation. 

These cities were not merely republican ; they were essentially 
democratic, in their origin, their institutions, their social relations, 
and their tendencies ; and my point is to show that this demo- 
cratic character was the first cause of their rapid growth in opu- 
lence. Being originally servile, or nearly servile, in condition, the 
inhabitants had no distinctions of rank to begin with ; their nat- 
ui'al enemies were the nobles, fi'om whose oppressive sway they 
were but recently emancipated. Trade and manufactures, being 
their only occupations, were necessarily held in high esteem among 
them ; and he enjoyed their highest confidence and respect who 
had been most successful in these pursuits. A common interest 
and common perils bound them very firmly to each other ; and 
the direction of affairs in their little state was naturally intrusted 
to those whose skill, prudence, industry, and economy had been 
already rewarded with the largest accumulations of wealth. No 
one was ashamed of his craft ; no one had anything to be proud 
of but his riches. A brewer and a tanner, a weaver and a gold- 
smith, sat side by side in the town-councils, or led the citizens to 
the defence of the walls, and even conducted them in armies to 
the field, where they often defeated the chivalry of France and 
Germany, and sometimes triumphed over their own monarchs. 
Van Artevelde of Ghent was a brewer ; the Medici of Florence, 
though popes and kings were reckoned among their posterity, were 
at first only successful merchants. Wealth being thus the only 
passport to distinction, and all the avenues to it being in high re- 
pute, its possession was eagerly coveted, and the virtues of indus- 
try and frugality were practised to the farthest extent. With the 
gi-owth and spread of opulence, and the calling forth of talent from 
the whole community through the absence of artificial distinctions, 
the rise and progress of literature aud the fine arts were necessa- 
rily associated. Poetry, painting, sculptiu-e, and architecture had 
their origin, in modern times, in the commercial republics of Pisa 
and Florence, and the free cities of Flanders. 

Wealth passed freely from hand to hand. Feudalism was barred 
out by the city-walls ; and the father's property, instead of being 
kept together for the aggrandizement of the family in the person 
of the oldest son, was distributed equally among the children. If 



104 ADVANTAGES OF THE POSSESSION OF WEALTH. 

one or more of these were prodigal, careless, or indolent, they sank 
to that level whence the thrift of the father had raised them, and 
their places were filled by the more capable and industrious. These 
alternations of fortune, rapid and frequent, kept up in the commu- 
nity a thirst for gain, and kept down discontent and civil commo- 
tions. An aristocracy of wealth has this at least to recommend it, 
if wholly disconnected with an aristocracy of birth, — that by its 
fluctuations it rather encourages effort than represses it. While 
society stagnated among the feudal nobility and at the courts of 
feudal monarchs, it was galvanized into an almost preternatural 
activity within the precincts of the little civic republics of Italy, 
Germany, and the Low Countries. The proud nobles were com- 
pelled to seek aid of the fat and wealthy burghers, the painstaking 
artisans, whom they affected to despise. They obtained loans from 
them, for which they gave their lands in pawn, and even sold to 
them outright their castles and hereditary estates. Ennobled by 
the possession of these, the ambition of the citizens grew by what 
it fed on, and not infrequently, as in the case of the Medici at Flor- 
ence, they became the ancestors of a line of kings. 

This sketch of the causes affecting the growth of opulence in an- 
cient and modern times is introduced principally for the purpose of 
illustrating the most remarkable difference in the social condition 
of Great Britain and the United States. The most striking thing 
in the aspect of American society is the constant strain of the fac- 
ulties, with all classes, in the pursuit of wealth, — the restlessness, 
the feverish anxiety to get on, which English writers, at least, are 
apt to regard only as " the disagreeable symptoms of one of the 
phases of industrial progress." In whatever light it ought to be 
viewed, they are certainly mistaken in attributing it to our favor- 
able position, with an abundance of fertile land, and with sources 
of opulence as yet fresh and unexhausted. Were such causes ade- 
quate to produce this particular effect, we should find society ex- 
hibiting the same characteristics wherever it is similarly situated, 
— in British America, for instance, in British Australia, and over a 
great portion of the South American continent. But it is not so ; 
and we must therefore look for an explanation of the phenomenon 
to some cause which is peculiar to our own social state, — to some 
stimulus acting upon what political economists call " the effective 
desire of accumulation," which has full scope to operate here, while 



INJURIOUS EFFECTS OF CASTE. 105 

it is repressed or much restricted in all other nations, — even in 
England, where the character of the population in other respects 
is so similar to our own. 

I find such a peculiar cause in the evident fact that every in- 
dividual here has the power to make savings, if he will, and almost 
as large as he will ; and has the certainty that the savings when 
made, the wealth when accumulated, will immediately operate, in 
proportion to their amount, to raise the frugal person's position in 
life, — to give him, in fact, the only distinction that is recognized 
among us. Neither theoretically nor practically, in this country, 
is there any obstacle to any individual's becoming rich, if he will, 
and almost to any amount that he will ; — no obstacle, I say, but 
what arises from the dispensations of Providence, from the unequal 
distribution of health, strength, and the faculties of mind. In other 
words, there are no obstacles but natural and inevitable ones ; so- 
ciety interposes none, and none exist which society could remove. 
And ours is the only community on earth of which this can be said. 
Here there are no castes, and not even an approach to a division 
of society by castes. Our whole population is in that state which 
I have attempted to describe as the condition of the inhabitants of 
a free town in the Middle Ages. The property which is rapidly 
gained is often quite as rapidlj'^ spent, for the sake of that consid- 
eration and influence which the reputation of riches alone can give. 
Hence, wealth circulates among us almost as rapidly as the money 
W'hich is its representative. A great fortune springs up, like the 
prophet's gourd, in a night, and is dissipated by some unforeseen 
accident on the morrow. Every one is made restless and anxious 
by this exposure to sudden change; but one great good comes of 
it, — that it keeps down permanent discontent, and stifles the jeal- 
ous}' that is usually nursed by social differences and inequalities of 
fortune. How is it possible, indeed, that the puor should be ar- 
rayed in hostility against the rich, when — to adopt a former illus- 
tration — the son of an Irish coachman becomes the governor of a 
State, and the grandson of a milUonnaire dies a pauper ] 

The effect of democratic institutions is to stimulate aii energy 
and activity in the pursuit of wealth, which accomplish greater 
wonders than all the modern inventions of science, which actually 
generate enthusiasm of character, and arc regarded by foreigners 
with surprise and distrust, as the. tokens of some constitutional 



106 ADVANTAGES OF THE POSSESSION OF WEALTH. 

disease in the body politic. Even the Irish immigrant here soon 
loses his careless, lazy, and turbulent disposition, and becomes as 
sober, prudent, industrious,, and frugal as his neighbors. Nearly all 
the enormous fortunes that have been gathered in this country are 
the growth of a single lifetime, and therefore, even if they were 
more evenly distributed than they now are at the death of their 
founders, there would not be a smaller number of them in the 
succeeding generation. Consequently, they are regarded as the 
prizes of industry, economy, and enterprise ; and the sight of 
them stimulates and sustains exertion, instead of chilling and 
repressing it, which is the effect produced by the fixedness, in 
certain families, of vast hereditary estates. 

The aspect of society in England in this respect I will not say 
is the direct contrary of what it is here ; for, with regard to a very 
large and influential class, it is just the same. The middle class 
— what on the Continent would be called the bourgeoisie, the 
merchants, the manufacturers, the small tradesmen, the master 
mechanics — are about as busy as we are here, in the pursuit of 
wealth ; and their numbers and influence in the state gave occa- 
sion to Napoleon's sarcasm, that the English were a nation of 
shopkeepers. But the parallel between their condition and that 
of the free towns in the Middle Ages may be carried much farther ; 
outside of the city-walls there are the nobles and the serfs. The ef- 
fect of the activity of the commercial class upon the eye of the 
philosophical observer is qualified by the comparative repose — 
the stagnation, one can almost say — of the laboring poor and of 
the nobility and landed gentry. These two classes, the top and 
the bottom of English society, are true castes, for nothing short of 
a miracle can elevate or depress one who is born a member of 
either. The true movement, the life, of the community in Great 
Britain is among those who are engaged in commerce and manufac- 
tures : here are alternations of fortune, — not so frequent, perhaps, 
as in this country, but as sudden and as great. An Arkwright 
begins life as a barber, and ends it as a millionna,ire ; a Peel gives 
his days and his nights to cotton-spinning, and his son be- 
comes prime-minister of England. But outside of this class there 
is stagnation and death. One half of the whole population is com- 
posed of laborers who subsist entirely upon wages, who cannot 
make savings if they would, for their whole earnings barely 



INJURIOUS EFFECTS OF CASTE. 107 

suflfice to keep soul and body together. Hopeless of rising, encour- 
aged by no examples, among those who were born his equals, of 
elevation to a higher grade, the laborer has no ambition, no 
thought even, of changing his position in life. His condition is 
best described in the strong language of McCulloch, when he 
speaks of " the irretrievable helotism of the working classes of 
England." And the upper classes, the nobility and the gentry, 
occupy a sphere which is equally immovable. With estates locked 
up by entails and marriage settlements, so that they cannot squan- 
der them, with an inherited scale of expenditure proportionate to 
their rank and fortune, so that they cannot make savings from 
income, and with a measure of political influence and social con- 
sideration secvired to them by the long-established habits and 
opinions of their countrymen, they form a caste almost as fixed as 
that of the Brahmins in India. 

Great inequality in the distribution of wealth may operate ei- 
ther as a check or a spur to industry and frugality ; it is not, then, 
in itself, to be deprecated. On the contrary, a perfectly uuiform 
partition of the goods of this world, if it were possible, which it is 
not, would create universal torpor. Take away the fear of pov- 
erty and the hope of rising in the world, and no one would exert 
himself but for his own amusement. Add the power of a despot, 
to make such exertion compulsory, and we should have exactly 
that state of things which existed in Egypt and India, when the in- 
stitution of castes as j-et was luiimpaired. If the whole population 
formed but one caste, from which they could neither sink nor rise 
by any fault or merit of their own, they would be no more inclined 
to labor than if they were divided into several castes. It is the 
fixedness, and not the inequality, of fortunes which is to be dreaded ; 
it is the retention of them in the same ftimilies throughout many 
generations, which chills exertion and unnerves the rrght arm of 
toil. Wherever there is motion, there is life. Property cannot be 
rendered immovable, except by the effect of human institutions 
which are designed to counteract the laws of nature. In this in- 
stance, surely, if in no other, the political economist has a right to 
cry, Laissez faire I — let alone ! and do not attempt to amend the 
ways of Providence ! We do try to amend them when we attemjit 
to enforce, or to render permanent, either equality or inequality. 
Laws of primogeniture and entail, the object of which is to insure 



108 ADVANTAGES OF THE POSSESSION OF WEALTH. 

to certain families the possession of their wealth forever, are not a 
•whit more unnatural and unjust in their operation, than would be 
the schemes of the philanthropic reformers, as they call themselves, 
who would fain reconstruct society on the basis of making the dis- 
tribution of all property equal and unchangeable. 

" The laws and conditions of the production of wealth," as Mr. 
Mill remarks, " partake of the character of physical truths. There 
is nothing optional or arbitrary in them. Whatever mankind pro- 
duce must be produced in the modes and under the conditions im- 
posed by the constitution of external things, and by the inherent 
properties of their own bodily and mental structure. Whether 
they like it or not, their production will be limited by the amount 
of their previous accumulation ; and, that being given, it will be 
proportional to their energy, their skill, the perfection of their ma- 
chinery, and their judicious use of the advantages of combined la- 
bor. Whether they like it or not, the unproductive expenditure of 
individuals will, to an equal extent, tend to impoverish the com- 
munity, and only their productive expenditure will enrich it. The 
opinions or the wishes which may exist on these different matters 
do not control the things themselves." 

Among such ultimate laws is the tendency to an unequal distri- 
bution of the wealth that is created by human labor. A law of 
natural justice, which is recognized by savages quite as much as by 
civilized nations, assigns the ownership of a useful article to him 
by whose skill and industry that article was created. The game 
that is caught, the implement of the chase that is manufectured, 
belongs, by the consent of all, to him by whom it is caught, or 
made. Nor is any alteration produced in this law because the suc- 
cessful person has so much strength, skill, and enterprise, that he 
can catch or manufacture two or three times as much as any other 
member of the tribe. The property is still recognized as his, for 
this simple reason, if for no other, — that he would not put forth 
his force and ingenuity if others should deprive him of their fruits. 
Again, if he chooses to hold these articles in reserve, instead of im^ 
mediately consuming them ; if he prefers a wigwam well stocked 
with implements of war and the chase, and a store of food for fu- 
ture use, to present indolence or the immediate gratification of his 
appetites, still his rights of ownership are respected. His prudence 
and economy, as much as his strength and skill, are allowed to re- 



INJURIOUS EFFECTS OF CASTE. 109 

dound iiiimediately to his own advantage. There is even a strong- 
ei' reason for respecting his property in this case than in the former 
one ; for the whole community profit by his savings : they operate 
to some extent as an insurance to them all against famine. There 
is now a stock of food or implements in the tribe, which, though 
not common property, may still operate for the benefit of all at 
some future day, when the chase happens to be improductive, be- 
cause the owner will sell them to others for their services, or for 
honors which it may be in their power to bestow. 

In this simple instance, we can easily see how injurious it would 
be to the common welfare if the rights of property were not re- 
spected, and how surely such respect tends to an unequal distribu- 
tion of the fruits of industry and frugality. As men are differently 
endowed by nature with faculties of mind and body, with indolence 
or energy, with improvidence or thrift, so their situations in life 
must differ. And it is the true policy of society to encourage the 
more valuable qualities ; — not to dishearten frugality by depriving 
it of its savings, nor to foster idleness by feeding it with the fruits 
obtained by the persevering toil of others. In civilized society, 
the same principles hold. The case becomes a little more compli- 
cated, because, by the transmutations of capital that have already 
been explained, the property of an individual is constantly assum- 
ing various shapes. But so long as it continues x'foductive proper- 
ty, so long, in one form or another, must it further and assist the 
operations of labor ; and so far must it benefit others as well as the 
owner. The general law, that industry is limited by capital, is 
borne out by the obvious consideration, that without implements, 
machinery, raw material, and a previously accumulated stock of 
food and clothing, the workman cannot bestow his labor to advan- 
tage, — cannot, in fact, work at all. 

Even if it were granted that all the wealth of a nation could be 
distributed equally among all the people, and that the stock of it, 
by obliging all to labor alike, would forever remain equal to all 
their wants, — and no more improbable supposition could be 
framed, — it is certain that this would be no real improvement of 
their condition. " Those who have never known freedom from 
anxiety as to the means of subsistence," says J. S, Mill, " are apt 
to overrate what is gained for positive enjoyment by the mere ab- 
sence of that uncertainty. The necessaries of life, when they have 



110 JOINT-STOCK CORPOEATIONS. 

always been secure for the whole of life, are scarcely more a sub- 
ject of consciousness, or a source of happiness, than the elements. 
There is little attractive in a monotonous routine, without vicissi- 
tudes, but without excitement, — a life spent in the enforced ob- 
servance of an external rule, and performance of a prescribed task ; 
in which labor would be devoid of its chief sweetener, the thought 
that every eflFort tells perceptibly on the laborer's own interests or 
on those of some one with whom he identifies himself; in which no 
one could by his own exertions improve his condition, or that of 
the objects of his private affection ; in which no one's way of life, 
occupations, or movements would depend on choice, but each would 
be the slave of all." 

People are not aware, or do not sufficiently consider, that the 
sight of the two extremes of opulence and poverty — the hope of 
rising to the one or the fear of falling into the other — is the con- 
stant stimiilus which keeps up that energy and activity of the lojt 
man race, through which alone these goods are created. Make 
men secure of a provision for all their wants, take away from them 
all objects of ambition, destroy both anxiety and emulation, — 
and these are the certain results of an enforced equality of proper- 
ty and condition, — and, after a few years, even if there remained 
anything to be divided among them (which there would not be, 
for their wastefulness under such circumstances would equal their 
indolence), they would become useless and discontented drones, de- 
voured by ennui, or eager for wrangling and fighting with each 
other, as the only means of relieving their otherwise stagnant 
existence. 



CHAPTER VII. 

STRIPE BETWEEN LABOBERS AND CAPITALISTS : STRIKES AND TRADE- 
UNIONS : MEANS OP IMPROVING THE CONDITION OP THE LABORING 

CLASSES. 

The rate of wages in any country is determined by the competi- 
tion of the laborers with the capitalists. Which shall have the ad- 
vantage in the competition will depend on the relative numbers of 
the two parties, and will be in an inverse ratio to these numbers. 



JOINT-STOCK CORPORATIONS. Ill 

In England, certainly, the capitalists have the advantage : their 
immense accumulations, and the fewness of those who can compete 
with them, when compared with the vast number of those who sub- 
sist entirely upon wages, enable them generally to dictate their 
own tenns, and to keep wages at the lowest point which will sup- 
ply the workmen with the necessaries of life. In this country, the 
laborers have a considerable advantage ; though in some respects 
they are not on equal terms wnth the capitalists, many of whom 
are now as wealthy as those of the same class in England. Most 
of the laborers for wages here have a little cajjital of their own, on 
which they could subsist for a time ; or, owing to the great demand 
for labor, they can find work in other establishments, perhaps in 
other trades. Here, frequently, it is not the employer w'ho dis- 
charges the workman or the domestic, but the workman or the do- 
mestic who discharges the employer. 

Many kinds of production can be successfully kept up only upon 
a large scale ; for the larger the enterprise, the farther the divis- 
ion of labor may be caiTied. In order to keep such enterprises in 
motion, capital must be aggregated in large masses. In England, 
the great inequality of the distribution of wealth allows such enter- 
prises to be managed by individuals : in most cases, a large manu- 
facturing establishment is owned either by one person, or by a 
firm which embraces but a few partners. In the United States, 
from what was, not many years ago, the comparative paucity of 
large private fortunes, such an establishment was generally formed 
and conducted by a joint-stock company, — which is comparatively 
a modem invention, but one that, from its democratic character, 
is peculiarly suited to this country and to the wants of the age. 
Many small capitalists, by clubbing their means, can successfully 
compete with men of vast fortune, — an landertaking which woixld 
otherwise be a hopeless one, as the gi'eat capitalist can live through 
reverses of trade, commercial crises, and casualties, which would 
ruin one who had little or nothing in reserve. So consonant are 
these joint-stock companies to the genius of our institutions and 
to the circumstances of the country, that they have multiplied 
with astonishing rapidity. They have survived even the necessity 
which called them forth ; for, as large private fortunes have sprung 
up with the growth of national opulence, the owners of them have 
preferred to distribute their capital by taking stock in many of 



112 STRIFE BETWEEN LABOE AND CAPITAL. 

these associations, rather than to concentrate it upon one under- 
taking. The risk of a sweeping calamity is thus materially dimin- 
ished. 

I know of nothing more irrational than the common prejudice 
against such corporations. They are true Savings' Banks, in which 
the common laborer not infrequently invests his modest savings, 
and shares the gains of his wealthy employer, instead of being 
crushed by competition with him. It is not unusual, I believe, 
for operatives to hold stock in the very manufactories in which 
they work for wages. At any rate, the Savings' Bank, to which 
they first confide the fruits of their economy, often invests them in 
such stock. These corporations allow persons of very moderate 
means to participate in enterprises which, in other countries, are 
conducted exclusively by the rich. The occasional failure of one 
of them does not bankrupt many of the stockholders, whose prop- 
erty invested in other ways is left untouched ; and as this seems 
a hardship to the creditor who has lost a portion of his due, he is 
apt to declaim against those who are rich and still do not pay 
what they owe. But his accusation is unjust : he who allows such 
an institution to become indebted to him trusts it on account of 
the largeness of its capital, and its supposed solvency. If he pre- 
fers, he may trust an individual who is supposed to be worth only 
$ 50,000, instead of a corporation reckoned at ten times that sum. 
If he chooses the latter course, he trusts the corporation, not the 
stockholders ; he deliberately prefers the joint-stock security to the 
security ofi^red by individuals : and, consequently, has no reason 
to complain if the latter do not pay him. 

During the last quarter of a century, joint-stock corporations 
consisting of operatives alone, and other associations of laborers 
with each other in order to promote their common interests, have 
rapidly increased in number and influence throughoiit Europe, 
but especially in England, France, and Germany. The disastrous 
revolutions of 1848 first drew serious attention to the fact that 
great uneasiness and discontent existed among the laboring classes 
in these countries, and especially among those who were more 
educated and intelligent. Labor and capital, instead of working 
harmoniously with each other in the pursuit of a common end, 
had come to be regarded as opposing interests, and the rivalry and 
antagonism between them often passed into feelings of bitter 



STRIKES AND TRADE-UNIONS. 113 

hostility. The earnings of the workman, even when united with 
those of his wife and children, were barely sufficient for subsistence 
on the coarsest and cheapest food ; while the aggregation of busi- 
ness and capital into a few hands, the improvement of the machin- 
ery, and the immense scale on which the work was done, disposed 
the laborers to contrast the wealth which they created for their 
employers with the misery of their own condition. The gains of 
the capitalists, it is true, were not always as large as they seemed. 
The keenness of their competition, and the rivalry of nations in 
the attempt to undersell each other in the markets of the world, 
often reduce profits to a minimum. Hence the first combined 
attempts of the operatives to enforce higher rates of wages often 
defeated their own end, by destroying profits altogether and there- 
by driving capital out of the business. Still the belief prevails, — 
and it is too well founded, — that while there has been a prodigious 
increase in the efiiciency of labor and in the amounts of wealth 
produced, the manual industry which has done nearly the whole 
work has failed to secure its just share of the proceeds. The 
conviction is wellnigh universal, that there must be a readjust- 
ment of the relations between capital and labor, and a larger share 
of the values produced be allotted to the latter. 

Labor, as we have seen, is limited by capital, and can accom- 
plish little or nothing without its aid. But there is no sufficient 
reason why the oivnership of these two agencies should be entirely 
disjoined; why comparatively few persons should own or control all 
the capital, and a vast number depend solely upon the wages of 
their handiwork. Hitherto a remedy for the hardships and injus- 
tice of the laborers' lot has been sought chiefly through their com- 
bination with respect only to their industry, strikes being organized 
to enforce higher rates of wages, under the penalty of woi-k being 
discontinued all at once, so as to cause machinery and other forms 
of capital to remain idle for a considerable time at a great loss 
to their owners. But it is easy to see that strikes are ruinous to 
both parties, — to the employed as well as to the employers. By 
diminishing production, discouraging enterprise, consuming cap- 
ital unproductively, and bringing in foreign competition, they 
dissipate the means of paying wages, and contract the field for 
the employment of industry. They spread dissension and inflame 
hostility, not only between employers and workmen, but among the 
8 



114 STRIKES AND TRADE-UNIONS. 

workmen themselves, the majority of them striving by insults and 
outrages of every sort, sometimes even by violence and menaces 
of death, to compel a few dissentients to engage in the strike 
against their will. The funds previously accumulated to support 
them in their self-enforced idleness are soon expended ; privations 
and extreme suffering ensue ; and then the irritated and half-starv- 
ing operatives seek vengeance by attacking the property or lives 
of their former employers, and thus incur the full penalties of the 
law. 

Even when strikes succeed, they have a demoralizing influence ; 
they violate the inalienable right of every individual to dispose of 
his industry and his property as he pleases ; and they lead to an 
unjust distribution of wages, because the uniform rates thus es- 
tablished raise the indolent and the unskilful to an equality with 
industrious and efficient workmen. Periods of compulsory idle- 
ness are destructive of all good habits, and impair the efficiency 
of subsequent work. Then, too, strikes do not always succeed. 
The employers can combine, as well as the employed; and on 
account of the fewness of their number and their large command 
of capital, they can hold out, though at great loss, longer than 
their opponents. They meet the strike by what is called a " lock- 
out," — shutting up every branch and department of all the man- 
ufactories, and thus compulsorily increasing the number of op- 
eratives without work, so that the funds provided for supporting 
them in idleness may be sooner exhausted. Often the distressed 
laborers are thus driven to surrender ; and then, after they have 
wasted all their previous earnings, and submitted to much hard- 
ship, they sullenly go back to work at the old, or even at reduced, 
rates of pay. 

But, however inexpedient and demoralizing strikes may be, they 
cannot, so long as those engaged in them refrain from any sort 
of outrage, be justly forbidden by law. Operatives have as good 
a right to form combinations either to work or to abstain from 
work, as their employers have, to unite in establishing a tariff of 
prices or wages. In this respect, the only motto for both parties 
must be, Laissez faire. If there is no express agreement to that 
effect, neither party is justly bound even to give previous notice 
of the termination of his engagement : no such contract ought even 
to be implied, in the absence of express stipulation. The pre- 



STRIKES AND TRADE-UNIONS. 115 

Bumption of law shoiild always be in favor of the largest liberty 
for both parties. English legislation attempted for a long while 
to curtail this freedom, by making it a penal offence for the 
workman or servant — the two words, used indiscriminately, 
showed in what estimation the former was held — to quit his 
employment without good cause, or to combine with others in 
an endeavor to raise wages. But such statutes are now repealed 
or disregarded, from a conviction of their injustice and inutility. 

Labor, as Mr. Thornton reminds us, will not heej). It cannot, 
like other commodities, be stored away to await a favorable turn 
in the market ; but it must be sold immediately, or a portion of 
it will be wasted with every hour's delay. Unlike most other 
traffickers, also, the laborer has but one commodity — his industry 
— to sell : if he cannot dispose of that, he has nothing else where- 
with to buy food. The capitalist-employer, on the other hand, 
has many alternatives. He can invest his property in government 
or railroad stock, send it out of the country in foi'eign under- 
takings, or put it into those forms of manufactures which, as they 
are carried on mainly by fixed capital, require comparatively few 
hands. The most impolitic thing the workmen can do is to pro- 
voke a contest with their employers in some branch of industry in 
which, because recently established or otherwise in an improsper- 
ous state, only low wages can be afforded. A strike is none the 
less fatal to them because it also ruins their paymasters, and 
thereby shuts up one field for employment. Those who work for 
wages, moreover, often do not have much except their wages to 
live upon ; and thus they find the old saying is true, that " the 
destruction of the poor is their poverty," for it will not allow them 
to chaffer about the price to be paid for their industry. The 
employers usually have to regard only their own competition with 
each other, being confident that the lowest price which they are 
thus induced to offer cannot fail to be accepted by nearly destitute 
applicants for work. When the rate of profits is high, this com- 
petition may be so keen that high pay will be offered ; but if the 
success of previous strikes has reduced profits to a minimum, the 
competition slackens so much that employment can be had only at 
very low rates. Thus the very success of the strikes may so far 
defeat their own object as to render any employment of labor on a 
large scale unprofitable. 



116 STRIKES AND TRADE-mnONS. 

Strikes are always impolitic in the long run, then ; for an open 
contest between labor and capital must be iiltimately destructive in 
its effects upon both. But as they are sometimes successful for a 
while in their immediate object, organizations for supporting them, 
and carrying them out on a large scale, have become very numer- 
ous of late, both in England and America. These Trade-Unions, 
as they are called, sometimes have as many as 50,000 members in 
a single branch of industry ; and by levying a small monthly as- 
sessment on the earnings of each, they accumulate large funds as a 
provision for any contest that may be impending. In England, in 
1865, the Miners' Association had 54,000 members, and the 
"Amalgamated Engineers " 43,000, distributed into 308 branches, 
and increasing at the rate of two or three thousand yearly. The 
annual income of these " Engineers " was over $ 430,000, and their 
accumulated funds amounted to | 700,000. The " Miners " in 
Pennsylvania, and the " Knights of St. Crispin," or associated boot 
and shoe makers, of Massachusetts, are hardly less numerous. They 
are under perfect discipline, turning out on strike at a day's no- 
tice, and remaining out till the word is given to end the strike, aU 
their movements being carefully concerted by their officers. They 
enforce membership even on those operatives who are unwilling to 
join them, by refusing to work for masters who employ non-Union- 
ists. In this way, employers have been compelled to discharge 
their own brothers or nephews, if they had not joined the Union. 
Thus armies of workmen are arrayed, as it were, in a hostile camp, 
to wage war upon that Capital on which the efficiency of their la- 
bor mainly depends. AU of the associations are also more or less 
affiliated with each other, and their treasuries render mutual aid, 
so as to prolong the contest till the patience or the capital of the 
particular employers who are standing out is exhausted. In all 
free countries, also, by concerted action at the political elections, 
they often obtain so much influence over the legislature as to dic- 
tate the enactment of laws to favor their interests. Master man- 
ufacturers, thus attacked, have no resource except to break up 
their establishments, and either send their capital abroad, or see 
it rapidly waste away. Then, indeed, skilled artisans cannot obtain 
employment on any terms, and are compelled to become agricul- 
turalists or rude laborers. 

As labor and capital, in the natural exercise of their functions, 



ALLIANCE OF LABOK WITH CAPITAL. 117 

are mutually dependent, and assist each other, we can see no cause 
for the misunderstanding and antagonism between them, except 
that they are too exclusively owned or controlled by different 
classes of persons. It would be Utopian to expect, indeed, that 
every capitalist should also be an artisan, and every artisan, at 
least in some small measure, a capitalist. But however it may be 
in the Old World, there is no reason, here in the New, why they 
should not go into open partnership with each other, throw their 
common earnings into one stock, and divide this upon equitable 
principles depending upon their respective efficiency and merits. 
Their union may even be so close that their respective shares 
would no longer need to be designated by distinct names, as Wages 
and Profits. As the evil arose from massing capital into too few 
hands, — a result which has been met and counteracted by massing 
the laborers into few associations, — the remedy must be found by 
breaking up both aggi-egations, and resolving them into so small 
bodies that the same persons may own both capital and labor, and 
throw these into a common fund. The principles for the estab- 
lishment of such union, and for the equitable division of the com- 
mon earnings, may be easily discovered, though it may be difficult 
to reduce them to practice. 

If the ordinary profits on Circulating Capital are ten per cent, 
and the ordinary wages of a skilled workman are $ 500 a year, it ia 
obvious that one who contributes $ 5,000 as capital, and the arti- 
san who contributes a year's labor, ought to receive an equal share 
of the common earnings. Then a manufactory carried on by half 
a million of capital and two hundred opex-atives might be made a 
joint-stock corporation of three hundred shares, one third of which 
would represent Capital, and the other two thirds Labor. From 
the net annual earnings, a sum sufficient to replace the Fixed 
Capital, vested in machinery, etc., as fast as it was worn out, 
should be deducted, and the remainder be equally divided among 
the three hundred shareholders. Inequality of skill and industry 
among the persons employed might be equitably compensated by 
allowing only half a Labor-share to an inferior workman, one and a 
half shares to a first-class hand, three shares to an overseer, and 
ten shares, or more, to the general manager and superintendent. 
The shares representing Capital need not be equally distributed 
among the associates ; but in order that the fusion of interests be- 



118 ALLIANCE OF LABOR WITH CAPITAL. 

tween Labor and Capital might be as perfect as possible, each op- 
erative should own at least a fraction, say one fourth, of a Capital- 
share ; while an overseer should possess not less than three such 
shares, and the general manager all the others, no person being al- 
lowed to own any capital in the concern who did not also contribute 
his own labor. As the operatives could not wait till the balance 
was struck at the end of the year before receiving any portion of 
their earnings, the invested capital ought to be large enough to 
allow advances to be made, weekly or monthly, of sums not ex- 
ceeding three fourths the probable amount of such earnings, in- 
terest being allowed to those who did not require the advances. 

In such a joint-stock association, each associate contributing 
both Labor and Capital, no antagonism such as leads to strikes 
could arise, and there would be no dispute about the equitable 
division of the common earnings. Another great gain would be se- 
cured, in that the strongest inducements would be offered for the 
diligence and fidelity of all the hands, each watching his fellow, in 
order that no carelessness or shirking of work should impair the 
net product. Several of the English Trade-Unions make rules ex- 
pressly forbidding unusual exertion or activity by any workman, 
the object being to obtain as much pay, and do as little woi'k, as 
possible. Bricklayers' laborers, for instance, are not allowed to 
wheel bricks in a barrow, or to carry more than eight or ten bricks 
at a time on their shoulders, the number varying with the height 
to which they are carried ; and the " Operative Masons " are en- 
joined " not to take up less time than an average mason in the 
execution of each description of work." Under such regulations, 
one is not surprised to learn that some kinds of English manufac- 
tures are already surpassed in excellence and cheapness by those 
made on the Continent, and that so many of the latter are im- 
ported into Great Britain that the operatives there are beginning 
to clamor loudly for a renewal of the Protective System. Free 
Trade finds advocates only among those who are sure that they 
have nothing to dread from foreign competition. 

The large funds accumulated by the Savings' Banks, Friendly 
Societies, and Trade-Unions, both of England and America, prove 
that laborers save enough fi-om their earnings to enable them to 
fiimish much of the capital for the very manufactories from which 
they now receive nothing but wages. There is no reason why this 



ALLIAJ^CE OF LABOR WITH CAPITAL. 119 

portion, at least, of the national Capital should be divorced from 
Labor in its application, though already united with it in owner- 
ship. By combining their responsibility they may also obtain 
credit for large loans of Capital, as has been proved by the great 
success of the Credit-Banks which Schulze-Delitzsch has estab- 
lished throughout Germany. 

One workman cannot usually obtain a loan when he needs it, 
for his credit is aot good enough, and he has no security to offer. 
But if a hundred workmen combine, in one of these Banks, both 
their credit and their small savings, the Bank can obtain for them 
loans at least thrice as gi-eat as the sums which they have de- 
posited in it, the security being the aggregate of these deposits, 
besides the joint and several responsibility of all the depositors. 
The aggregate Capital thus formed — consisting, we will suppose, 
of $5,000 received from the deposit of savings, and $10,000 more 
obtained by loan from other institutions or individuals — is then 
invested, at a somewhat higher rate of interest, in small loans to 
those of the depositors themselves who happen to need such ad- 
vances ; and thus one of the workmen so associated can obtain for 
a considerable time, and at a moderate rate, the use of a capital 
from two to four times as great as the amount of his own savings. 
A small entrance-fee is required, and then the value of one share, 
which is $ 50, may be made up by small monthly payments : a 
loan can be obtained only when the share is fully paid up. The 
profits of the Bank arise from the interest obtained on the sums 
deposited, and from the difference — usually three or four per 
cent — between the interest received and that which is paid on the 
amounts procured by loan. After deducting five per cent, in order 
to form a reserve fund which, together with the entrance-fees, will 
ultimately cause the Bank's own stock to equal its boiTowed capi- 
tal, these profits are divided annually among the shareholders. 
Any one who quits the association by withdrawing his deposit for- 
feits his share of this reserve fund, and also continues for a year to 
be liable for the debts incurred by the Bank before his witlidrawal. 
Only the shareholders can obtain loans, and as they constitute the 
association and control its management, they keep a sharp lookout 
on each other, to prevent their profits from being diminished by 
irrecoverable debts. 

Such an institution is evidently a modified Savings' Bank, which 



120 ALLIANCE OF LABOK WITH CAPITAL. 

employs both its own funds and its credit to enable its depositors 
to add the profits of capital to the wages of their labor. The 
plan has had great success ; for, in 1865, there were 1,300 of these 
Credit-Banks in Germany, with more than 300,000 members. 
About 500 of them, from which we have returns, had nearly 
1 70,000 members ; had accumulated eight millions of dollars in 
their share capital, additional deposits, and reserve funds ; had 
loaned in one year fifty millions to their shareholders ; and had 
distributed, as the net profits of one year's operations, nearly 
$288,000, or over three and one half per cent, having lost in that 
year only $15,000 by bad debts. 

Experience has proved, also, that the capital thus placed within 
the control of the workman can be profitably applied by him in 
connection with his own labor, and will make that labor more 
faithful and economical, more painstaking and contented. Co- 
operative stores have been established with capital supplied by 
the laborers themselves, at which they can obtain the necessaries 
and comforts that they require, on better terms than can be of- 
fered by the retail tradesmen, who are burdened with heavy 
expenses in rent, advertising, competition with each other, and 
bad debts. The poor are obliged to pay high prices for bad pro- 
visions and grocei'ies, because they buy very small quantities at a 
time, thus enhancing the cost of weighing, making up packages, 
etc. ; because they are not good judges of the quality of the ar- 
ticles purchased ; and because, though they cannot obtain credit 
for themselves, they must pay the higher rates of profit necessi- 
tated by " bad debts " from other customers, which the most . 
prudent retail dealers cannot wholly avoid. The Rochdale Pio- 
neers' Association was founded, in 1844, by twenty-eight journey- 
men mechanics, who had kept out of debt, and who, by combining 
their means, made up a little capital, less than $150, hired a room 
at a rent of $50, purchased at wholesale prices some sacks of 
flour and oatmeal, a barrel of sugar, a firkin of butter, and a few 
other small articles, and commenced business. One of them was 
deputed to act as salesman, the store being opened only for a few 
hours in the evening twice a week. Rigidly adhering to the rule 
of selhng only for cash, and charging for good articles only the 
prices cxirrent in the neighborhood for bad ones, they soon found 
that over fourteen per cent of these prices were returned to them 



ALLIANCE OF LABOR WITH CAPITAL. 121 

at the end of the year under the form of a thirty-per-cent divi- 
dend of profits on their capital. Very soon, coal, meat, shoes, 
cotton and woollen goods, and all other commodities which work- 
men need to purchase, were added to the original business, and 
the institution has become one of the most prosperous ever es- 
tablished for the benefit of the working classes. In 1867, it had 
nearly seven thousand members, employed $ 640,000 as capital, 
and distributed over $ 200,000 as profits. Nearly two hundred 
similar Co-operative Store societies have since been established in 
England, and their sales amount annually to thirty millions of 
dollars. Many others have been founded in Gei'many and this 
country, and always with good success when they have adhered to 
the rule of never selling on credit, and when they have had com- 
petent and faithful managers, whom it is always good policy to 
secure, even at high salaries. 

In many instances, also, manufacturing and mining enterprises, 
and the mechanic arts and trades, have been successfully con- 
ducted, and on a large scale, — either by the workmen themselves 
furnishing the capital, or a large portion of it ; or by capitalists 
giving to their operatives a share of the profits in addition to their 
ordinary wages. Even in the latter case, where the alliance be- 
tween Labor and Capital is less complete, it is generally found that 
the more hearty co-opei'ation, thus secured, of the employed with 
their employers, and their greater diligence, zeal, and carefulness 
in the work, so much increase the profits that the net income of 
the proprietor is larger than its gross amount was before any de- 
duction was made for the benefit of the workmen. 

Thus, the Briggs collieries in England had been conducted for 
twelve years with small success, chiefly because the men employed, 
nearly one thousand in number, were on ill terms with the pro- 
prietors ; strikes were frequent, — one of them lasting for thirty- 
five weeks ; holidays were often demanded, during which the 
machinery and works remained idle at a great loss ; and general 
waste and carelessness prevailed. Consequently, the profits were 
small, for two years being only five per cent, and rising above ten 
per cent only for one year. To remedy this state of things, the 
business was transferred, in 1865, to a joint-stock company, one 
third of the shares being ofiered, at $ 50 each, to the miners and 
hired agents and overseers. It was also agreed that, whenever 



122 ALLIANCE OF LABOR WITH CAPITAL. 

the profits, after reserving a portion sufficient to renew the 
machinery when worn out, should exceed ten per cent, one half 
of such excess should be distributed as a bonus to all the persons 
employed in or about the collieries, in sums proportional to their 
respective earnings during the year in which the profits accrued, 
the other moiety of the surplus being added to dividend on capi- 
tal. This offer certainly was not remarkable for liberality ; but it 
operated like a charm in producing the heartiest co-operation and 
good-will among all the parties concerned, and in promoting indus- 
try and avoiding waste. At one time, the price of coal having 
fallen, even a general reduction of wages was accepted without 
remonstrance. For the first year of the new system, the profits 
were fourteen, for the second they were sixteen, and for the third, 
seventeen per cent. In 1858, four hundred and fifty-four shares 
had been purchased by those engaged in the collieries, and the 
market price of each share had risen to $ 72. A similar experi- 
ment, tried for over fifteen years by M. Leclaire, — a house-painter 
employing, in Paris, more than two hundred hands, — has been 
equally successful. 

Many attempts have been made to effect a still more complete 
alliance between the two agents of production, the whole capital 
being owned or managed by the work-people. This end, of course, 
is more difficult to be accomplished, even on a small scale, and is 
impossible on a large one ; since the laborers, even by clubbing their 
savings and their credit, cannot obtain capital enough to meet all 
the exigencies of a great manufactory, and to live through the 
reverses to which they are exposed in the fluctuations of trade. 
The mode of trying the experiment is obvious enough. " A num- 
ber of workmen, having contrived to procure the needful tools 
and raw material, must agree to work together at the same 
trade, under directors chosen by themselves from amongst them- 
selves, and must further agree that the entire net proceeds of 
their industry shall be divided, in some prearranged proportion, 
among all who have contributed, whether by their labor or their 
capital, or by both, to the joint production." The French govern- 
ment has recently aided such enterprises by moderate loans at 
the outset; and with such aid, some associations of printers, 
cabinet-makers, masons, and other classes of artisans, at Paris, have 
\een decidedly successful. Thus, in 1848, nine journeyman cabi- 



ALLIANCE OF LABOR WITH CAPITAL. 123 

net-makers formed themselves into a joint-stock company, with 
only one hundred dollars of capital. They soon obtained a good 
deal of custom, and their number increased more than tenfold. 
The state then helped them with a loan of $ 5,000 for fourteen 
years, at four per cent ; and in 1857, they numbered one hundred 
and sixty-five associates and " auxiliaries," and were doing a busi- 
ness of $80,000 a year. In 1862, there were fourteen similar 
societies at Paris among the various trades, having an aggregate 
capital of $ 180,000, and the products of their business amount- 
ing to half a million annually, the average rate of profit being 
nearly twenty-three per cent. 

In England, companies of this sort have not been so successful, 
as small enterprises there cannot so easily compete with large 
ones. Yet government has aided them, as far as seemed pru- 
dent and practicable. Parliament has passed laws sanctioning 
"partnerships of industry," as they are termed, in which the 
workmen are allowed to have an interest in the profits of the 
business, without becoming liable as partners for the debts ; and 
encouraging co-operative stores and associations. Statutes have 
also been passed to recognize and regulate " Friendly Societies," 
formed by workmen for mutual life-insurance, and to grant small 
weekly allowances in case of sickness ; also, to encourage building- 
associations, to open the Post-Offices as Savings' Banks for the 
laboring classes, and to grant annuities and life-assurances under 
the guaranty of the state. In Germany, under the practical 
guidance of the same wise philanthropist who invented and estab- 
lished the Credit-Banks, Schulze-Delitzsch, twenty-six companies 
had been established among the artisans, up to 18G5, for the pro- 
duction and sale of finislied wares on common account ; and one 
hundred and eighty other associations, with about ten thousand 
members, for the supply, at wholesale prices, of the raw materi- 
als required by those who worked separately at their respective 
trades. Some of these organizations have been successful, while 
others have failed to answer the expectations of their members. 

It is evident that many experiments must still be tried before 
the plans for combining the ownership of Capital with that of 
Labor — or, in other words, of merging profits and wages into a 
common fund — can be perfected. The attempt is most likely to 
succeed in those manufactures and trades in which labor con- 



124 ALLIANCE OF LABOR WITH CAPITAL. 

tributes more largely than capital to the value of the commodity ; 
and unfortunately, the number of these is every day diminishing, 
because the progress of invention and the improvement of 
machinery tend inevitably to mass the business of production in 
vast establishments, which require an immense capital, and easily 
crush out, or outlive, small enterprises. In New England, for 
instance, within a quarter of a century, the invention of power- 
presses, sewing-machines, and almost countless contrivances for 
abridging manual labor in manufactures from iron and leather, 
have brought together into monster workshops the printers, tail- 
ors, shoemakers, and blacksmiths, who formerly plied their trades 
one by one, or in small parties. 

Another obstacle to the success of co-operative associations 
arises from the difficulty of securing competent head management. 
The direction of a large business generally demands great sagacity 
and foresight, perfect acquaintance with the markets, and famil- 
iarity with a mass of mechanical, pecuniary, and administrative 
details. These qualities are not often found united in one person, 
as is proved by the frequency of failures and bankruptcies ; and 
even when they exist, they are not likely to be fully developed 
and exerted, except under some stronger stimulus of self-interest 
than is afforded by the receipt of a good salary or a small fraction 
of the profits. Committees of management are proverbially negli- 
gent or meddlesome, inharmonious and unsuccessful : one execu- 
tive head, and a very able one, is an essential prerequisite of 
success in any large undertaking. 

It must be expected, then, that there will be the same alterna- 
tions of failure with success in the business of combined workmen, 
as in that of individual capitalists. It is for the workman himself 
to judge, whether he will quit the security of his present position 
for the heavy risks and doubtful advantages of an active share in 
the business. At present, he is guarantied against loss. The 
workman's wages are his share of the average profit and loss 
commuted into a fixed payment. " The capitalist alone endures 
all the losses, alone furnishes all the advances, alone encounters 
the risk of ruin, and receives only what profits may remain after 
the laborer's commuted share is paid. The workman's share is a 
first mortgage ; the capitalist's share is only a reversionary claim." 
Under the light of the experiments which have thus far been 



THE MALTHUSIAN THEORY OF POPULATION. 125 

made, perhaps the best advice which can be given is, that the 
employed should continue in the receipt of moderate wages, and 
that the manager-capitalist should, for his own sake as well as for 
that of the other parties concerned, promote harmony, prevent 
strikes, and encourage diligence and fidelity, by annexing to the 
wages one third or one half of whatever surplus profits there may 
be over such a rate per cent as woidd be an average income on 
ordinary investments. The pi'obable result will then be, as in 
the case of the Briggs collieries, that the proprietor's share, after 
this deduction, will be greater than it would have been had no 
such deduction been made. 



CHAPTER VIII. 

THE MALTHUSIAN THEORY OF POPULATION CONSIDERED AND REPUTED : 
THE TRUE LAW OF THE INCREASE OF POPULATION. 

The laws of Political Economy, for the most part, are inferences 
from the general fact that individuals compete with each other in 
the pursuit of wealth. Rents, Profits, Wages, Prices, are deter- 
mined by competition ; and as we are able to foresee what the 
effects of competition will be, we can show how these things will 
vary under given circumstances. Thus, Profits tend to an equal- 
ity in all employments, because capitalists compete with each 
other, and will withdraw their capital from a business which is 
less profitable, to invest it in one which is more so ; this influx of 
capital into the more lucrative employment soon reduces the rate 
of profit in it to a level with the Profits in other employments. 
The Price of an article, of which there is a given quantity in the 
market, is determined by the Demand for it, — that is, by the 
competition of the buyers. And this Demand, again, regulates 
the future Supply of that article ; for, as the competition of the 
buyers becomes warm, the Price is enhanced, the Profits of those 
who produce the article are increased, more capital is attracted 
into the employment, the Supply is enlarged, and the Price falls 
again. 

These principles are sufficiently obvious ; and if there were not 



126 THE MALTHUSIAN THEOKY OF POPULATION. 

exceptional cases, if their application was not modified and re- 
stricted by a crowd of circumstances, Political Economy might be 
called a demonstrative, or even an intuitive, science. Its maxims 
might all be taken for granted, and men would act upon them 
without giving themselves the trouble of enunciating them in an 
abstract form. But there are numerous exceptions and modifying 
circumstances, which need to be carefully considered ; and in this 
chapter I propose to examine the most important of them. 

There are two things the Supply of which is not regulated by 
the Demand ; and they are two very important things, — namely, 
Land and Population. Our wants and our desires do not, in these 
two cases, create, or even tend to create, the means of satisfying 
them ; those means are wholly beyond our control. We cannot 
increase the quantity of surface of the habitable globe ; we cannot, 
at will, either enlarge the Population, or put limits to its growth, 
except by transgressing the moral laws which guard the sanctity 
of human life. It is conceivable that the well-being of a com- 
munity may be greatly affected by these two inexorable facts. 
With all its labor and ingenuity, it cannot materially enlarge the 
limits of its territory, except by robbing its neighbors; it may 
reclaim a little land from the waters along the margin of a river, a 
lake, or an ocean ; but it is obvious that its power in this respect 
is restricted within very narrow limits. And if its Population 
should begin to waste away, or to increase with undue and incon- 
venient rapidity, the will of a monarch or the wishes of a people 
would not suffice to arrest either its decline or its growth. StiU 
they are dependent for food upon the products of the Land, the 
amount of which products must finally be limited by the extent 
of surface of the earth. 

On this possible or conceivable increase of the numbers of man- 
kind, united with the fact that the cultivable surface of the earth 
is a fixed quantity, which cannot be enlarged, is founded the cele- 
brated theory of Mr. Malthus. We are not at liberty to put aside 
the discussion of this doctrine, as if it were a mere speculation, 
which can have no practical importance except in a contingency 
certainly very remote, and which map never be realized. It is 
dwelt upon and applied by nearly all the English Economists as 
if it were a truth of great moment. The whole subject of Politi- 
cal Economy is colored with it ; it afiects the doctrine of Rent, 



THE MALTHUSIAN THEOEY OF POPULATION. 127 

Profits, and Wages, and leads to inferences in respect to each of 
them, which otherwise would be immediately rejected. 

The followers of Malthiis ai'e somewhat dogmatic in their enun- 
ciation of the doctrine, and altogether impatient of any doubt of 
its correctness. This positiveness arises from a perception of the 
unquestionable coiTectness of the data on which the theory is 
founded ; while the general reluctance to accept it proceeds from 
involuntary dread of the shocking conclusions that it has been 
made to support, and from disgust at the consequences of its 
practical application. The doctrine of Malthus is sometimes 
understood, in its extended sense, to comprise the whole body 
of these inferences from it, together with its application as advice 
for the government of men's conduct and the regulation of soci- 
ety ; and when it is thus understood, the common sense and 
natural feelings of mankind shrink from it with that strong aver- 
sion which the supporters of the theory stigmatize as " sentimen- 
tal horror." Taken in the more restricted meaning, always used 
by believers in the theory when it is controverted or denied, Mal- 
thusianism contains only one or two truisms about the law of in- 
crease that is common to the human race with the whole animal 
creation, which have no practical importance whatever, except for 
the purpose to which they were first applied by Malthus himself, 
— namely, to confute an absurd speculation by Godwin as to the 
perfectibility of the social state. Upon this ambiguity of mean- 
ing depends the whole controversy as to the law of Population 
and its consequences upon the well-being of society. 

The proposition upon which the whole theory rests is this, — 
that the power of increase of any race of animals, the human 
species included, is indefinite, or incapable of exhaustion ; and 
if it were exercised to the titm,ost, vntliout any check from external cir- 
cumstances or from the animals power of self-control, the earth would 
not be large enough, I do not say merely to afford subsistence, but 
even to give standing-room, to the beings who would claim a place 
upon it. The capacity of increase necessarily acts in a geometrical 
progression ; for, each pair being capable of procreation, if a people, 
under certain circumstances, increase within thirty years from ten 
thousand to twenty thousand, a mere continuance of the same cause 
and the same circumstances would enlarge the number, within the 
next thirty years, to forty thousand ; and the third period would 



128 THE MALTHUSIAN THEORY OF POPULATION. 

carry it to eighty thousand. For example, a given rate of increase, 
in the ten years from 1790 to 1800, added but 1,200,000 to the 
white Population of this country; but from 1830 to 1840, the same 
rate of increase added 3,600,000. The Population was more than 
doubled from 1790 to 1820 ; it was again more than doubled from 
1820 to 1850. But the former doubling added less than five mil- 
lions to our numbers, while the latter doubling added over ten 
millions; and the next doubling, in 1880, will add twenty mil- 
lions. 

This law of possible increase in a geometrical progression be- 
longs to every species, both of the animal and vegetable kingdom, 
of which we have any knowledge ; it is an immediate and logical 
inference from the self-evident fact that every pair, whether of the 
earliest or the latest generation, whether forming part of a very 
small, or a very numerous, community, is equally capable of con- 
tinuing and multiplying its kind. Its prolific power is not at all 
afiected by the greater or smaller number of its feUow-creatures 
which may be already in existence. If Population should go on in 
this manner without check, it is evident that, within a few centu- 
ries, the earth might literally be overstocked with human beings : 
if they should stand shoulder to shoulder, as thickly as the stalks 
of wheat in a cultivated field at harvest-time, there would still be 
a call for room ; for the next thirty years would inevitably double 
even this immense assemblage. 

Observe that this law of. increase by geometrical progression 
holds good, whether the annual rate of increase be fast or slow. 
In the United States, for instance, the annual rate, exclusive of the 
effects of immigration, is 2.39 per cent, and, as a consequence, the 
Population is doubled in little over 32 years. In France, the 
annual rate is but 0.6, and the Population, therefore, is not 
doubled in less than 115 years. Still, it will be doubled in that 
time ; and therefore, in 230 years it will be quadrupled ; thus fol- 
lowing the law of increase by geometrical progression, if it in- 
crease at all. The theory of Malthus may be said to owe its 
plausibility, in great part, to the fact with which all arithmeticians 
are familiar, that a number, increasing by geometrical progression, 
within a few terms rises to a very formidable amount. 

Mr. Malthus further undertakes to show, that the means of sub- 
sistence, under the most favorable circumstances, cannot increase 



THE MALTHUSIAN THEORY OF POPULATION. 129 

80 rapidly as the number of mouths calling for food. The race of 
Population against food, ho maintains, is like that of Achilles 
against a tortoise ; it is too unequal, whatever may be the advan- 
tage at first possessed by the weaker party. Whatever may be 
the present superfluity of sustenance, or the means of inci-easing 
sustenance. Population multiplies so fast that it must soon over- 
take and siu'pass the supply of nourishment. Looking at first only 
to Great Bi'itain, he says: "If it be allowed that, by the best 
possible policy and great encouragements to agriculture, the 
average produce of the island could be doubled in the first twenty- 
five years, it will be allowing probably a greater increase than 
could with reason be expected. In the next twenty-five years, it 
is impossible to suppose that the produce could be quadrupled. 
It would be contrary to all our knowledge of the properties of 
land. The improvement of the barren parts would be a work of 
time and labor ; and it must be evident to those who have the 
slightest acquaintance with agricultural subjects, that, in propor- 
tion as cultivation extended, the additions that could yearly be 
made to the former average produce must be gi-adually and regu- 
larly diminishing. 

" Let us suppose that the yearly additions which might be made 
to the former average produce, instead of decreasing, which they 
certainly would do, were to remain the same ; and that the pro- 
duce of this island might be increased, every twenty-five years, by 
a quantity equal to ivhat it at present produces. The most enthu- 
siastic siDCCulator cannot suppose a gi'eater increase than this. In 
a few centuries, it would make eveiy acre of land in the island 
like a garden. If this supposition be applied to the whole earth, 
and if it be allowed that the subsistence for man which the earth 
affords might be increased every twenty-five years by a quantity 
equal to what it at piresent produces, this will be supposing a rate of 
increase much greater than we can imagine that any possible exer- 
tions of mankind could make it. It may fairly be pronounced, 
therefore, that, considering the present average state of the earth, 
the means of subsistence, under circumstances the most favorable to 
human industry, could not p>ossibly be made to increase faster than 
in an arithmetical ratio. 

" The necessary effects of these two difierent rates of increase, 
when brought together, will be very striking. Let us call the Popu- 
9 



130 THE MALTHUSIAN THEOEY OF POPULATION. 

lation of this island 11 millions, and suppose the present produce 
equal to the easy support of such a number. In the first 25 years, 
the Population would be 22 millions; and, the food being also 
doubled, the means of subsistence would be equal to this increase, 
fn the next 25 years, the Population would be 44 millions, and the 
means of subsistence only equal to the support of 33 millions. In 
the next period, the Population would be 88 millions, and the 
means of subsistence just equal to the support of half that num- 
ber. And at the conclusion of the first century, the Population 
would be 176 millions, and the means of subsistence only equal to 
the support of 55 millions, leaving a Population of 121 millions 
totally unprovided for. 

" Taking the whole earth instead of this island, emigration would 
of course be excluded; and supposing the present Population equal 
to one thousand millions, the human species would increase as the 
numbers 1, 2, 4, 8, 16, 32, and subsistence as 1, 2, 3, 4, 5, 6. In 
two centuries, the Population would be to the means of subsistence 
as 256 to 9 ; in three centuries, as 4,096 to 13 ; and in two thou- 
sand years, the difference would be almost incalculable." 

Malthus does not find much comfort in the fact that the hu- 
man race have already inhabited this globe for more than six 
thousand years, a period svu-ely long enough, with the aid of a 
geometrical progression, even if the annual rate of increase had 
been very small, but regular, to have brought into being vastly 
more than the poor 800 millions who now stock the earth. Prac- 
tically, down to the present day, the only evil which has been felt 
has been, not an excess, but a deficiency, of Population. Even 
Spain, once the head of European civilization, had ten millions of 
inhabitants in the middle of the sixteenth century, and one hun- 
dred and twenty years afterwards it had only six millions. The 
classical scholar need not be reminded of the still more striking 
depopulation of Italy under the Roman emperors, and, at a still 
earlier day, of the provinces which now constitute Turkey in 
Europe. Asia Minor and the region on the banks of the Tigris 
and Euphrates were teeming with inhabitants twenty-five centm-ies 
ago, while they are now very sparsely populated, and probably do 
not increase at all. 

But the causes which formerly kept down the natural increase 
of the people have now, in all civilized communities, in a great 



THE MALTHUSIAN THEORY OF POPULATION. 131 

measure ceased to act. War is, at present, an infrequent and 
much less destructive calamity. Epidemic diseases no longer lay 
waste whole provinces; remedies for them, or modes of pi-eventing 
them, have been discovered. The practice of vaccination alone, 
by robbing that frightful disease, the small-pox, of its terrors, has 
added some years to the average dm-ation of human life. The 
greater prevalence of cleanliness, the improvement of the diet, 
dress, lodgings, and other accommodations of the mass of the peo- 
ple, and the drainage of bogs and marshes, by which agues and 
marsh fevers have been prevented, with the many improvements 
in medical and surgical science, have materially lessened the rate 
of mortality, and thus caused the population to increase more 
rapidly. 

A compai-ison, made by M. de Chateauneuf, of the movement 
of the Population in most countries of Europe, from 1825 to 1830, 
with what it was from 1775 to 1780 — an interval of only half a 
centiu-y — supplies some striking illustrations of this point. Out 
of a given number of children born in Eiu-ope, only one third, says 
the author, now die in the first ten years, while formerly one half 
died within that period. Fifty years after birth, three fourths of 
a generation, or 75 in a hundred, had died; now, only thirteen 
twentieths, or 65 in a hundred, die below the age of fifty. The 
proportion of deaths to the whole Population is now as one to 
forty; then, it was as high as one to thirty-two. 

These facts, to most people, would seem to afford great cause 
for congratulation. Human life has been made longer ; disease 
has lost a portion of its power, or has been conquered by care and 
medical science. Population is kept up, not merely by increasing 
the number of births, but by lessening the proportion of deaths ; 
thus, among a given number of inhabitants, there are fewer chil- 
dren; and hence the average strength and capacity, the productive 
power of the community, is increased. " The prevalent opinion," 
says McCulloch, " had been, that an increase of population was 
the most decisive mark of the prosperity of a state, and that it 
was the duty of government to stimulate its increase, by encour- 
aging early marriages, and granting exemptions from onerous 
public services, and bestowing rewards on those who reared the 
greatest mmiber of children." 

" But Mr. Malthus," he adds, " has set the erroneous nature of 



132 THE MALTHUSIAN THEORY OF POPULATION. 

this policy in the most striking point of view. He has shown, 
by careful examination of the state of countries in every stage of 
civilization, and placed under the most opposite circumstances, 
that the number of inhabitants is everywhere proportioned to the 
means of subsistence ; that the tendency of the principle of increase 
is not to fall below, but to exceed, these means " ; and consequent- 
ly, the Population must be kept down to its necessary level, either 
by the influence of moral restraint, and a proper degree of pru- 
dence and forethought in the formation of marriages, — that is, by 
the Preventive check, which diminishes the number of births, and 
so increases the effective power of the community ; or it must be 
kept down by the influence of mortality originating in vice, want, 
pestilence, and misery, — that is, by the Positive check, which in- 
creases the number of deaths, and so makes the community weaker 
than before. 

I cannot trace out here all the gloomy consequences which Mal- 
thus and his followers derive from his theory; it must suffice, to 
indicate a few of them. He assumes that the Population in every 
coimtry in Europe has already increased to such a degree that it 
is actually pressing upon the means of subsistence ; and as it 
tends still to multiply faster than the quantity of food can be 
increased, the low wages of labor, poverty, disease, crime, and an 
average duration of life much less than it might be, are the inevi- 
table consequences. Stop up the evil in one quarter, and it must 
break out in another, on account of the prolific power which is in 
reserve. If we put an end to war, famine or some epidemic dis- 
ease must take its place, and carry off" yearly as many victims as 
the war would have done. Stop the ravages of the sraall-pox by 
vaccination, and the Asiatic cholera, or some other disease, must 
appear, to scourge mankind with an equal number of deaths, 
if men will not learn prudence enough to diminish the number of 
marriages and births. The vessel is already full, and it is also fed 
from beneath with perennial springs. Check the overflow in one 
quarter, therefore, and it must escape in another. " I feel not 
the slightest doubt," says Malthus, " that if the introduction of 
the cow-pox. should extirpate the small-pox, and yet the number 
of marriages continue the same, we shall find a very perceptible 
difference in the increased mortality of some other disease." 

Wages, it is further said, depend on the proportion between the 



THE MALTHUSIAN THEORY OF POPULATION. 133 

numbers of the laboring class and the capital which is devoted to 
paying for labor. As the number of those seeking employment 
increases, — and it always tends, like a depressed spring, to rise, 
— the laborers compete with each other in offering to work at low 
prices, and Wages inevitably fall. Vainly does private munificence 
or public liberality seek to prevent this evil. Interference, in fact, 
only does harm : if the laborer can look to a poor-fund, or to pri- 
vate charity, to provide against the effects of his imprudence, he 
will never learn to be prudent. Leave him alone, then, say the 
Malthusians, to be chastised by fever, hunger, and misery into a 
sense of his obligation to society to refrain from increasing the 
number of his class. Let not the possession of a starving family 
constitute an additional claim for him who begs your charity; 
rather let it be his punishment. To devise means for relieving the 
present frightfid condition of the laboring poor in England and 
Ireland is a hopeless and insoluble problem. The best advice 
which the leading Economist of this school can give his country- 
men, in respect to this subject, is, that they shoidd " fold their 
arms, and leave the denouement to time and Providence." 

The most effectual means of keeping down the increase of Popu- 
lation, it is said, is, to raise the laborer's ideas of what is necessary 
for his maintenance. Thus, says Col. Thompson, "a laborer in 
Ireland will live and bring up a family on potatoes ; a laborer in 
England will see the world unpeopled first. Englishmen have the 
physical capability of living on potatoes as much as other men ; 
but fortunately they have not the habit ; and though it might be 
wrong to say that they would starve first in their own persons, 
they will utterly refuse to multiply upon such diet, — the effect of 
which on Population is ultimately the same. The Englishman 
will not live and bring up a family on potatoes ; because, though 
he may consent to live on them when he can positively procure 
nothing else, habit, custom, the opinion of those around him, have 
made it in his eyes contemptible, irrational, absurd, for a man to 
be living on potatoes when he has the opportunity of getting any- 
thing better. In his hours of prosperity, therefore, he will to a cer- 
tainty solace himself upon bacon, and most probably venture upon 
beef; and as this absorbs a greater portion of his income in what 
he views as necessary to his individual existence, it proportionally 
reduces his disposition to burden himself with new mouths." 



134 THE MALTHUSIAN THEORY OF POPULATION. 

I have endeavored to give as full a view as possible of the the- 
ory of Malthus and its consequences, without disguising the force 
of any of the considerations that may be adduced in its support. 
Without accusing it of any demoralizing tendencies, it must be ad- 
mitted to present a very gloomy view of the condition of the human 
race, and of the ways of Providence with man. I hope to prove 
satisfactorily, that the doctrine itself is a mere hypothetical specu- 
lation, having no relation to the times in which we live, or to any 
which are near at hand. In those facts which appear so alarming 
to the Malthusians, I see only indications of a beneficent arrange- 
ment of Providence, by which it is ordained that the barbarous 
races which now tenant the earth shall waste away and finally 
disappear, while civilized men are not only to multiply, but to 
spread, till the farthest corners of the earth are given to them for 
a habitation. 

I begin with the proposition, that the power of the earth to 
afford sustenance is now so far in advance of the actual numbers 
of mankind, that no probable, and in fact no possible, increase of 
those numbers, not even by a geometrical progression, can create a 
general and permanent scarcity of food for centuries to come. The 
great and palpable error of the Malthusians consists in assuming, 
without a particle of evidence, — nay, when all the evidence tends 
to the contrary, — that the time has already come; that Population 
has reached its limits ; that there is even now a deficiency of food ; 
so that the only present mode of increasing the happiness of the 
lower classes is, to lessen their numbers. Malthusianism in its sim- 
plest form is only the expression of a law that belongs both to the 
animal and vegetable kingdom, and its truth is undeniable ; yet we 
say that it has no applicability to the present state of aflairs, and 
we have no immediate concern in establishing its truth or falsehood. 
' The absurdity of talking about the necessary pressure of Popu- 
lation upon the means of subsistence, as an explanation of the evils 
with which society is now oppressed, was well exposed, many years 
ago, by Col. Thompson. " If it should be urged," he says, " that 
there nmst ahvays come a time when Population will press against 
food, and therefore there is no use in attempting to escape it, — 
this would be like urging that there is no use in a man's escaping 
from murder now, because he wiU not be immortal afterwards. 
There is all -the difference in the world between enduring an evil 



THE MALTHUSIAN THEOKY OF POPULATION. 135 

by the will of Providence, and by the act of man. Human life, 
in the whole, is but the procrastination of death ; but that is no 
reason why men should die just now, for other men's convenience. 
There may come a time when there will be no coal to burn, no 
iron to make tools, and perhaps no salt left in the sea ; but this is 
no reason why men should not make something of the interval 
which must intervene. The time when Population will press irre- 
mediably against food must, to a great manufacturing and naval 
people, be almost as remote as the time when there will be no salt 
left in the sea." 

The average density of Population in Europe, in which quarter 
of the globe alone any excess of numbers is to be feared, for 
centm-ies to come, does not exceed 70 persons to the square 
mile. The Em'opeans, then, on an average, are not quite so 
crowded as are the inhabitants of Spain, a country the Population 
of which might be increased fourfold before it would be as thickly 
peopled even as England. Belgium has the densest Population of 
any state on the Continent of considerable magnitude, the average 
amounting to at least 350 persons to the square mile. Great Brit- 
ain and Ireland, in respect to which the complaints of over-popu- 
lation have been loudest and most frequent, had but 251 to the 
square mile in 1861, so that the pojxilation might be increased 
thirty-eight per cent before these countries would be as densely 
peopled as Belgium. Taking all Europe together, the Population 
might be five times as gi-eat as it is now, before the inhabitants 
would be as crowded as they already are in Belgium. Supposing 
that the avei-age rate of increase for all Europe were as high as it 
now is in France, — a supposition which is certainly beyond the 
truth, — more than three centuries must elapse before the Conti- 
nent could be thus peopled, even if no allowance were made for 
emigi'ation, and for the gi-adual lessening of the rates of increase as 
the Population becomes more dense. Making allowance for these 
checks, the period must be increased to at least five centuries. 
An evil which is some five hundred years distant from us need not 
excite much alarm in the present generation. 

Is there any evidence, then, that Belgium is over-peopled, the 
country which is already in the condition that all Europe fears it 
wiU arrive at some five centuries hence ] By no means. The in- 
formation which shows that it is not, I derive from McCulloch, who 



136 THE MALTHUSIAN THEORY OF POPULATION. 

is himself an ardent upholder of the theory of Malthus, so that his 
testimony can be received without question. " Although the culti- 
vation of the earth in this kingdom is carried to a great extent, 
one eleventh of the surface still remains uncultivated ; one eighth 
consists of grass lands, and the arable lands occupy one half. The 
very large produce obtained by the Flemish farmer is solely attrib^ 
utable to indefatigable industry ; for the soil is naturally poor, and 
the climate is by no means especially favorable, the winters being 
longer and more severe than in England. The central part of the 
kingdom includes much of the richest portion of the soil ; but it 
does not, on the whole, esceed the average fertility of the inland 
counties of England, and must decidedly be considered inferior to 
the rich alluvial soils denominated the carses of Scotland. But 
taking the whole country together, the soil, artificially enriched, 
produces more than double the quantity of corn required for the 
consumption of its inhabitants, and agricultural produce is exported 
to a gTeat extent." 

Looking, therefore, merely to the capacity of the earth to afford 
sustenance, it appears that the most densely peopled country in 
Europe, and one by no means richly favored in respect to the natu- 
ral properties of its soil, is not yet more than half populated ; and 
still several centuries must elapse before all Europe can be as 
densely populated as Belgium. Malte Brun has said that the soil 
of Europe alone could afford ample food for a thousand millions of 
inhabitants, being nearly five times its present number, and more 
by one fifth than the actual population of the globe. Turning to 
America, we find the basin of one great river, the Mississippi, ca- 
pable of supporting as many inhabitants as now occupy all Europe, 
though the actual population of the whole United States does not 
equal one tenth part of that number. If we add the tropical and 
southern portions of the great American continent, and then go to 
the antipodes to look at Australia, the area of which does not fall 
far short of that of all Europe, — if we consider what an insignifi- 
cant fraction of these vast regions is yet tenanted by civilized man, 
— we are obliged to give up our statistical calculations in despair ; 
the imagination fails to grasp the possible number of human beings 
whom the earth might support, or the number of years that must 
elapse (judging from the world's history thus far) before this extent 
of space can be fully peopled, and there can be a just call for room. 



THE MALTHUSIAN THEORY OF POPULATION. 137 

Till this limit is approached, — that is, for several centuries yet 
to come, — every birth adds something, or might add something, 
to the possible surplus of food. If there are more mouths to feed, 
there are more hands to feed thern xoith ; if there is more work to be 
done,, there are more laborers to do it. It is demonstrable that, 
since the labor of one person upon the soil must produce more 
than is necessary for his own subsistence, the more hands there 
are employed in agriculture, the greater will be the surplus for 
those engaged in other occupations. That the surplus will not in- 
crease in tlie same ratio with the number of agricultural laborers, 
is a fact of no importance ; before the growth of the Population 
can be checked by absolute deficiency of food, there must cease to 
be a7iy surplus, and the earth must not yield enoi;gh even for the 
subsistence of him who cultivates it. We may have as much dread 
of this contingency as of the sun's expending its whole stock of 
light and heat, or of there being no salt left in the sea. 

Ireland is an instance directly in point to bi-ing the doctrine 
of the Malthusians to a test. They say that the island is over- 
peopled, and that their excessive number is the cause of the 
wretchedness of its inhabitants. But in ordinary years, Ireland 
not only supplies food for her whole Population, but her exports 
of the cereal grains alone amount to five millions sterling, and of 
meat, butter, and cheese to at least half as much more. It is 
absurd, then, to say that the Population is here pressing against 
the means of subsistence ; and if the doctrine does not hold true 
in this case, to what country in the civilized world is it applica- 
ble ? Another view of the matter leads to the same result. If 
the land were parcelled out, and the same modes of cultivation 
pursued, in Ireland as in the Netherlands, the former country 
being naturally far the more fertile of the two, it is demonstrable 
that the soil would furnish abundance of food for twenty-six mil- 
lions of inhabitants, instead of supporting, as it now does, little 
over five millions and a half, of whom, a few years ago, one half 
were on the brink of starvation. 

Barbarous, and even half-civilized, nations, it is admitted on all 
hands, are in no danger of multiplying too rapidly ; the law of a 
geometrical progression is not applicable to them ; they do not 
increase, but decrease. The aborigines of a country, wherever 
they come in contact with civilization, melt away as ice and snow 



138 THE MALTHUSIAN THEOKY OF POPULATION. 

do at the approach of summer. So it has been with the Indiana 
of our own continent, with the natives of Austraha, the Hotten- 
tots of South Africa, the Moors of Barbary, and the natives of the 
Pacific isles ; and so it must always be. War, disease, vice, and 
ignorance, which are necessary accompaniments of the savage state, 
are destructive of human life ; they do not allow the Population 
to increase ; they seldom permit it to hold its own. Go a little 
higher in the social scale, and this result is but little modified. 
The Turks, the Arabs, the Tartars, the Hindoos, are probably not 
so numerous as they were a century ago. The countries which 
now form Turkey in Europe and Turkey in Asia were more popu- 
lous, two or three thousand years ago, than they are at the present 
day. The wasting away of such tribes may be, in some cases, the 
consequence of a deficiency of food ; but it is certainly not the 
result of over-population ; for the civilized men who come to occu- 
py their places obtain from the same soil abundance of food for 
a Population larger than theirs by twenty or a hundred fold. The 
bounty of Providence is not exhausted, but men do not make 
proper use of the means that are within their reach for satisfying 
their bodily wants : it matters not whether they leave much of 
the soil untilled, or send a large portion of its product out of 
the country while millions are famishing at home. 

Civilized nations, let them multiply as fast as they may, do not 
devote their attention chiefly, or even in great part, to the supply 
of food, but to the acquisition of wealth. Exchangeable value in 
general, not the means of subsistence even in particular, is the 
object of their endeavors. What matters it to me, that my neigh- 
bor owns and cultivates a large extent of fertile land while I do 
not own a square foot, — provided that I have plenty of money in 
my purse 1 With that money, I can purchase food of my neigh- 
bor; I can even lay the fertility of both Indies and of the farthest 
corners of the earth under contribution to supply my personal 
wants. Communities and nations act, in this respect, just like 
individuals. If it be more profitable to them to devote their 
arable lands to other purposes than those of husbandry, they will 
do so without hesitation, being confident that they will be sup- 
plied with food from other lands. The inhabitants of Barba- 
does, with a soil abundantly capable of supplying their wants, 
actually devote all their ground and labor to the cultivation of 



THE MALTHUSIAN THEORY OF POPULATION. 139 

sugar, cotton, and a few tropical products, which they export ; 
while they import all their provisions, their wheat, pickled fish 
and salted meat, butter, cheese, etc., from the United States. They 
do not, on their own gi'ound, raise food enough for the hundredth 
part of their own consumption. What they do almost exclusively, 
all commercial and manufacturing communities do to a certain 
extent. They devote their energies to getting wealth, and buy 
food whencesoever it may come -to them, being careless whether 
it is raised in their own or in foreign lands. 

Since the abolition of the corn laws, and of other oppressive 
chai'ges in the British tariff, the market price of the chief articles 
of provision is not, and cannot be, ten per cent higher in Liverpool 
than in Boston ; and the supply of these articles (which is the only 
point that we need consider here) is just as abundant in the for- 
mer place as the latter. The farmers of Ohio, Wisconsin, and 
Iowa would rejoice at an opportunity to supply England and 
Ireland with all the wheat that they require. A failure of the 
English crops, or a multiplication of the English people, is certain- 
ly no misfortune to us, though we have to supply the food which 
in that case becomes necessary. Is it then a misfortune to the 
English, — a misfortune, I mean, of such a character as to justify 
them in complaining of the ways of Providence for sending more 
human beings upon the earth than the earth is capable of support- 
ing ] It is a calamity, unquestionably, in regard to the acqukition 
of wealth; for the necessity of buying so much food diminishes 
their store of wealth. But it is not a calamity in regard to the 
supply of food, or to the limited extent and fertility of the earth's 
surface. Man, not Providence, is in fault. Great Britain is 
obliged to buy all her cotton, an article of almost as universal con- 
sumption as wheat ; yet this fact, being one to which she is ha- 
bituated, is not made a subject of complaint. Cotton, however, 
can be produced to advantage only in a few regions, of compara- 
tively limited extent ; while the cereal grains can be raised over 
three fourths of the surface of the habitable globe. Should a new 
process of agriculture be discovered, by which cotton could be 
grown throughout England with so much facility and profit that 
the yearly returns of the farmer from it would be twice as great as 
from wheat, it is very certain that no wheat would then be raised 
on English ground, and yet there would be no deficiency in the 



140 THE MALTHUSIAN THEOKY OF POPULATION. 

supply of that necessary article. In this case, she would raise her 
cotton and buy her wheat; now, she raises her wheat, and buys 
her cotton. 

We can now see with sufficient distinctness the two great facts 
which afford a complete refutation of Malthusianism. The first is, 
that the limit of Population, in any country whatever, is not the num- 
ber of people which the soil of that country alone will supply with 
food, hut the number xvhich the surface of the whole earth is capable 
of feeding ; and it is a matter of demonstration, that this limit can- 
not even be approached for many centuries. The inability of Eng- 
land alone, or of Ireland alone, to supply her teeming population 
with food, is a fact of no more importance in the world's economy, 
than the inability of the city of London alone to supply her two 
millions of people with farm-produce from her own soil. Lon- 
don taxes all the counties of England for sustenance ; England 
taxes all the countries of the earth for sustenance ; — I cannot see 
any difference between the two cases. 

Then, secondly, I say that the practical or actual limit to the 
growth of Population, in every case, is the limit to the increase and 
distribution, not of food, but of wealth; and it is certain that, in 
every civilized country, the increase in the number of its inhabi- 
tants is attended by a more than proportionate increase of its 
wealth. Among civilized men in modern times, a famine is created, 
not by any absolute deficiency in the supply of food, but because 
the poorer classes have no money to buy it with. As every hu- 
man being is an implement for the production of wealth, a means 
of enlarging the aggregate national product or the amount of ex- 
changeable values belonging to a nation, the increase of Population 
is not a cause of scarcity of food, but a preservative against it. It 
makes no difference whether the mass of the people are engaged 
in hammering iron, spinning cotton, or raising wheat ; for the 
product in each of these cases either is food, or is exchangeable 
for food, which amounts to precisely the same thing. Commerce 
distributes equally all products for which there is an equal de- 
mand. Our crops did not fail in 1847 ; but the price of grain, in 
our seaport towns, and even in our back country, rose in as great 
proportion as in Ireland and Scotland. But all classes of our peo- 
ple were still able to buy the grain, even at the advanced price ; 
while one haK of the Irish people, and perhaps one sixth of the 



THE MALTHUSIAN THEORY OF POPULATION. 141 

Scotch, were too poor to obtain it at this price, and therefore they 
hungered, and very many of them died of starvation. 

This is the true explanation of the famine of 1847 in the British 
Isles. The march of civilization, the extension of trade, the facili- 
ties of transport, and the consequent ease of supplying the failure 
of the crops in one country by the superabundance of the harvest 
in another, have made the recurrence of a proper famine, in mod- 
ern times, impossible. By a -proper famine, I mean such an abso- 
lute deficiency of food, and impossibility of obtaining it on any 
terms, as is suffered by the garrison of a besieged town, or by the 
crew of a wrecked ship. It is not in the scheme of Providence, as 
hitherto revealed to man, that harvests should fail all the world 
over at the same time, or even for the failure to be so general that 
the aggi-egate product should not suffice, — perhaps with some 
scrimping and some hardship, — for the aggi'egate want. No civi- 
lized nation, either in the Old or New World, ever fears an abso- 
lute deficiency of food : its fields may be unfruitful for a single 
season ; but, in such case, it looks with well-founded confidence to its 
neighbors, and even to remote parts of the earth, for a supply. In 
1847, the bounty of Providence to the British Isles did not fail ; 
shiploads of corn were turned away from their shores for want of a 
market. The gi-anaries of the two islands were filled to overflow- 
ing, not indeed from the products of their own harvests, but from 
the immense supplies poured into them by our ever teeming land. 
Flour and meal became a drug in the English market before a 
sheaf of that year's wheat was cut, and many dealers in grain were 
bankrupted by the consequent sudden reduction of prices. The 
fate of the Irish and Scotch appeared the more ten-ible, because 
they starved in the midst of plenty. They died, not because the 
fields were cursed with barrenness, but because they had not 
wherewithal to buy food. The price of breadstuffs did not become 
more than double its average in ordinary years, — did not rise so 
high, by one third, as in 1800 and 1801 ; and in those years, though 
there was scarcity, there was no famine. The year 1847 witnessed 
a frightful anomaly, which will long be remembered as a disgrace 
to modem civilization, — a famine of which poverty was almxtst the 
sole cause. 

A fallacy pervades the whole reasoning of the Malthusians on 
the relation of the supply of food to the growth of the Population. 



142 THE MALTHUSIAN THEORY OF POPULATION. 

More grain is raised because there are more men who need it; and 
not more men are raised because there is more grain to feed them 
with. Procreation is not stopped because there is no more grain; 
since misery and the peril of starvation only make men reckless, 
and cause them to multiply faster. But agriculture is stopped 
when there are no more mouths calling iox food ; a cessation of De- 
mand causes a cessation of Supply here, because the husbandman 
is looking only for pecuniary gain. But in the case of Population, 
a want of Demand does not occasion a want of Supply ; since men 
are urged by their natural inclinations, and not by the state of the 
children-market, or by the desire of profit. They do not always 
marry because they want children, but because they want a wife. 
It is true, that the call for more food, which is created by an ex- 
cess of numbers, will not be an effectual calling unless the people 
have the means to purchase it with; but these they will never 
lack if the wealth of the country is distributed according to the 
natural course of things, — that is, in exact proportion to the in- 
crease of each family, all the children sharing alike. At any rate, 
if the demand be rendered ineffectual from this cause, the real evil, 
the real check upon the Population, is not the insufficient supply 
of food, but the want of property. Turn the matter as we may, it 
is not the niggardliness of nature which is the source of misery, 
but the devices of man and the injustice of his laws. 

In truth, it is demonstrable both from reason and experience, 
that Population never can rise to the point where it will meet this 
last and insuperable obstacle, — the absolute inability of the earth 
to contain and support more. Among the immediate evils to be 
first removed are ignorance, vice, bad government, and a virtual 
division of society into castes through unnatural, yet fixed, in- 
equalities of wealth and condition. Take away these, and you wiU 
remove along with them the widely spread misery which they 
foster, and which is the great cause why Population multiplies 
unduly, or under circumstances that are not fitted for it. Hope- 
less misery renders men imprudent and reckless, and leads them 
to burden themselves with a family, though they are already 
starving, because they cannot be worse off", and there is no hope 
of improving their estate. To adopt the phraseology of Mr. 
Malthus, take away the Positive check, and the Preventive check 
will come into play of its own accord, — wiU come into play as the 



THE LAW OF POPULATION. 143 

easy, beneficent, and necessary result of the laws of nature and 
nature's God. 

Whatever tends to keep men hopelessly poor is a direct en- 
couragement, the strongest of all incentives, to an increase of 
Population. Take away the causes of misery, remove the insur- 
mountable barriers which now keep the various classes of Eiaro- 
pean society apart, and educate the people, — and there will be no 
fears of an excess of numbers. Take away the lower weights 
which keep down the spring, and the lever will never rise high 
enough to meet the upper check. The bounty of Providence 
never fails. It is not the excess of Popidation which causes 
the misery, but the misery which causes the excess of Population. 
The Malthusians say that the rise of wages encourages man-iages 
among the poor, and thus augments the distress. On the con- 
trary, it is the fall of wages which, by inducing recklessness and 
despair, causes the poor to multiply faster. 

Having considered the doctrine of Malthus, let us now examine 
the true thecay of Population, by inquiring into the circumstances 
which govern its increase and distribution. The law which regu- 
lates the increase of numbers in a civilized society is not hard to 
find, though it is difficult to express all the modifications that it 
undergoes from a change of circumstances. The consideration 
which affects most strongly the inclinatiou of people to labor and 
to save, and thereby furnishes the chief stimulus for the accumu- 
lation of capital, also regulates in a great degree their tendency to 
increase in number. It is natural that it should be so : other 
things being equal, a man's condition as married or single, and the 
size of his family, are decisive of his worldly fortune. If his ambi- 
tion is awakened by a fair prospect of obtaining wealth and rising 
in society, he will become prudent not only in his expenditures, 
but in contracting any relations which may become a burden to 
him, — which may impede his efforts to rise, and may even tend 
to depress him in the world. In a normal state, then, the inclina- 
tion of peo2)le to marry is controlled by their opinion of the effect 
which marriage will have upon their position in life. 

The eldest son in a wealthy family, where the right of primo- 
geniture prevails, will marry, because his future is seciire : what- 
ever may happen, a fortune is secured to him against the effects 
even of his own imprudence. The miserable laborers on his es- 



144 THE LAW OF POPULATION. 

tate, who do not taste meat more than once in a month, will 
marry because their future is secured in another way. They have 
touched bottom; nothing can sink them in the world, and no 
degree of prudence or self-denial can ever raise them above a 
laborer's estate. Their children, it is true, may starve, or die of 
diseases induced by insufficient or improper food. But excessive 
misery creates recklessness and despair ; they who have no hope 
or fear cannot be expected to deny themselves the only alleviation 
of wretchedness of which their state is capable. 

The younger sons in noble or wealthy families, if the patrimony 
falls exclusively to the eldest, generally remain single, or marry 
late in life, as an early connection of this sort would be certain 
degradation; at any rate, they could not maintain the style of- 
living to which they have been brought up. Now, as the marriage 
of only one person out of a family cannot do more than keep up 
the number in the class to which they belong, and often may not 
effect even that, these families constantly tend to die out ; and if 
it were not for promotions to their rank from the middle classes, 
the upper orders of society would gradually disappear. Of the 
216 Barons who sat in the English House of Lords in 1854, the 
peerage of all but 30 had been created since 1711 ; and 127, or 
considerably more than half of the whole number, had been ad- 
mitted to the peerage since 1800. Royal families are still more 
prone to die out than the families of noblemen ; from the line of 
succession to the English throne, the families of the Plantagenets, 
the Tudors, and the Stuarts have already disappeared; and the 
house of Brunswick, saving that branch of it the title of which ia 
transmitted through a female, exists by a very slender tie, and will 
probably soon be extinct. The history of the Bourbons and sev- 
eral other royal families in Europe is of a similar character. But 
the principle is, perhaps, most strikingly exemplified among the 
landed gentry of England, whose continued and increasing opu- 
lence is chiefly to be attributed to this cause ; for the diminution 
of their numbers, of course, tends to the concentration of their 
estates. 

In the order of Providence, there is a natural check to the 
excessive accumulation of property in the hands of a few, and to 
the consequent debasement and misery of the multitude. This 
natural corrective, when not counteracted by unwise laws, tends 



THE LAW OF POPULATION. 145 

efifectually to equalize the distribution of wealth, so that not many 
persons can be brought to extreme destitution, except by their own 
obvious fault. This check exists in the very circumstance to which 
the English Political Economists are fond of attributing the whole 
evil, — the natwal multiplication of the human species. Property 
in the hands of an individual unquestionably tends to accumulate ; 
one who has both money and industry can make greater gains 
than one who depends on industry alone. But, from the short- 
ness of human life, an individual can hold this property only 
for a brief period of years. When he dies, it descends to his off- 
spring ; and by the law of nature, as they are all equally near to 
him, it is equally divided among them. ^Vhen this law is not 
abrogated by human legislation, — that is, where the right of 
primogeniture and laws of entail do not exist, — it causes so fre- 
quent a distribution of estates as effectually to overcome the 
tendency of capital to accumulate, or to continue in a single line 
of heirs. No sooner is wealth heaped up than it is parcelled out 
again, and a constant circulation is thus maintained, which sends 
the life-blood of capital into every part of the body politic. The 
faster the Population increases, the more rapidly does this corrective 
of the accumulation of property operate ; for the greater the num- 
ber of heirs, the moi'e minute is the division of the parent's wealth. 
In the intermediate conditions of life, the frequency of mar- 
riages still depends on the same rule, though its operation is 
affected by the general circumstances of the country, and by the 
particular position of individuals. In a newly settled region, chil- 
dren are a help to the parents' advancement, because labor is so 
valuable ; hence the rapid advance of Population in the frontier 
States of our own Union, — an advance which immigration alone 
does not account for, though a considerable part of it is certainly 
attributable to this latter cause. In a more thickly populated 
country, children are a hindrance, from the difficulty of establish- 
ing them in an equal position of life with their parents. But even 
in this case, those who are in easy circumstances will marry, 
while those who can but just maintain themselves in the condi- 
tion of life in which they were bom will often remain single. This 
last case is that of the peasantiy of many countries of Continental 
Europe, who cultivate their own little farms, and are perpetually 
admonished by the moderate size of their properties, that any in- 

10 



146 THE LAW OF POPULATION. 

crease of their number must lead, not indeed to starvation, but to 
the forfeiture of their position as land-owners. Thus, in Switzer- 
land, which is, in the main, a country of small proprietors, the 
Population increases so slowly, that, at its present rate, it is esti- 
mated that it would not double itself in less than 227 years. In 
France, where also the land is cut up into very small estates, but 
■where the peasantry are less prudent, less disposed to make calcu- 
lations respecting the future, than the Swiss, the estimated period 
of duplication varies from 115 to 138 years. 

The general effect in the Old World, then, may be thus stated, 
— that the numbers of the poor increase most rapidly, of the middle 
classes more slowly, and of the upper or wealthier ones, either not 
at all, or so slowly as hardly to be perceptible. "By a singu- 
lar anomaly," says Alison, "the rapidity of increase is in the 
inverse ratio of the means which are afforded of maintaining a 
family in comfort and independence. It is greatest when these 
means are least, and least when they are the greatest." This is 
strikingly illustrated in Sweden, where the census and the regis- 
tration of births, deaths, and marriages are taken with reference 
to the division of the people into three classes. The official 
returns for 1835 give the following results: — The yearly excess of 
births over deaths among the persons reckoned as belonging to 
the nobility was only one for every 1,508. For those who ai'e 
described as "persons of property and station," the yearly ex- 
cess was one for every 640 ; while for the peasantry it was one 
for every 107. In other words, the rate of increase for the peas- 
antry is nearly six times greater than that of the middle class, and 
over fourteen times greater than that of the nobles. Thus do the 
laws of nature itself operate against a permanent or hereditary 
aristocracy. 

If we compare different countries with each other, we still find, 
in every case, that the lowest classes increase most rapidly, and 
that the rate of increase diminishes as we ascend in the social 
scale. But we also observe that this law becomes more prominent 
and conspicuous according as these social distinctions are more 
fixed and unalterable, — that is, as they approach the nature of 
castes ; and also, it becomes more marked in proportion to the de- 
gree of poverty and wretchedness of the lowest class. Thus, we 
can discern the operation of the law even in this country; where 



THE LAW OF POPULATION. 147 

it is matter of common observation, that laborers, mechanics, small 
tradesmen, and farmers generally many at an early age, and 
have large families ; while educated men, members of the profes- 
sions, and sons of wealthy parents often defer " establishing them- 
selves in life," as the phrase goes, till a comparatively late period. 
But owing to the general well-being of all classes here, and to the 
fi'equency and rapidity of transitions from one class to another, 
these differences are less obvious than in the Old World, 

In France, where the land is minutely divided, and the peasan- 
try are vastly better off than in England, the rate of increase of 
the population, for ten years, is only 5 per cent ; in England it is 
15 per cent; and in Connaught, the sink of Irish misery and 
degradation, from 1821 to 1831, it was as high as 22 j)er cent. 
In the province of Ulster, the rate is 14, while in the county 
of Donegal it rises to 20 per cent. "And this is precisely the 
county which official reports represent as forming an exception to 
the general condition of Presbyterian Ulster, and affording an 
instance of poverty little less extreme than that of Connaught. 
In the latter province, we find Galway and Mayo, notoriously the 
two most destitute counties, exhibiting, the one an increase of 27, 
and the other of 25, per cent." Excluding the effects of emigi-a- 
tion, this rate is nearly as high as in the United States ; so that 
the two extremes, of general misery and general well-being, produce 
very nearly the same effect on the movement of the population, — 
a fact utterly irreconcilable with the theory of Malthus. 

The probable result for our own country may now be very 
clearly seen. So long as land continues abundant and cheap, and 
the wages of labor high, so long the Population will continue 
to increase with great rapidity. Barbarous tribes wiU die out 
before its advancing wave, and the desert will be peopled. But as 
the country fills up, and the wages of labor fall, it will become 
more difficult to rise fi'om one class of society to another, and the 
rate of increase will diminish. When the land becomes as thickly 
settled as Belgium now is, — a result which centuries will be re- 
quired to accomplish, — the Population will advance as slowly as 
it now does in Belgium. I see nothing in this prospect which 
need alarm even those who are most apt to be apprehensive of 
the future. 

Mr. Senior has very happily illustrated the truth, that the 



148 THE LAW OF POPULATION. 

Preventive check upon marriages is the fear, not of lacking the 
necessaries of life, or of positive starvation, but of being deprived 
of those comforts and enjoyments which custom has marked out 
as appropriate for every condition in life, or every rank in the 
social scale. 

" Though an apprehended deficiency of some of the articles of 
wealth is substantially the only Preventive check to the increase 
of Population, it is obvious that fear of the want of different arti- 
cles operates, with all men, very differently ; and even that an 
apprehended want of the same article will affect differently the 
minds of the individuals of different classes. It appears to us, 
therefore, convenient to divide for this purpose the articles of 
wealth into the three great classes of Necessaries, Decencies, and 
Luxuries, and to explain the different effects produced by the fear 
of the want of the articles of wealth falling under each class. 
It is scarcely necessary to remind our readers that these are 
relative terms, and that some person must always be assigned 
with reference to whom a given commodity or service is a Luxury, 
a Decency, or a Necessary. 

" By Necessaries, then, we express those things, the use of which 
is requisite to keep a given individual in the health and strength 
essential to his going through his habitual occupations. 

" By Decencies, we express those things which a given individual 
must use in order to preserve his existing rank in society. 

" Everything else of which a given individual makes use, or, 
in other words, all that portion of his consumption which is not 
essential to his health and strength, or to the preservation of his 
existing rank in society, we term Luxury. 

" It is obvious that, when consumed by the inhabitants of dif- 
ferent countries, or even by different individuals in the same 
country, the same things may be either Luxuries, Decencies, or 
Necessaries. Shoes are Necessaries to all the inhabitants of Eng- 
land. Our habits are such, that there is not an individual whose 
health would not suffer from the want of them. To the lowest 
class of the inhabitants of Scotland, they are Luxuries ; custom 
enables them to go barefoot without inconvenience and without 
degradation. When a Scotchman rises from the lowest to the 
middling classes of society, they become to him Decencies. He 
wears them to preserve, not his feet, but his station in life. To 



THE LAW OF POPULATION. 149 

the higher class, who have been accustomed to them from infancy, 
they ai-e as much Necessaries as they are to all classes in Eng- 
land. To the higher classes in Turkey, wine is a luxury and 
tobacco a decency; in Europe, it is the reverse. The Turk 
drinks and the European smokes, not in obedience, but in opposi- 
tion, both to the rules of health and to the forms of society. 

" The question, whether a given commodity is to be considered 
as a Decency or a Luxury, is obviously one to which no answer 
can be given, unless the place, the time, and the rank of the 
individual using it be specified. The di-ess which in England was 
only decent a hundred years ago, would be almost extravagant 
now ; while the house and furniture which now would afford 
merely decent accommodation to a gentleman would then have 
been luxurious for a Peer. The causes which entitle a commodity 
to be called a Necessary are more permanent and more general. 
They depend partly upon the habits in which the individual in 
question has been brought up, partly on the nature of his occupa- 
tion, on the lightness or the severity of the labors and hardships 
that he has to undergo, and partly on the climate in which he 
lives. The fuel, shelter, and raiment, which are essential to a 
Laplander's existence, would be worse than useless under the 
tropics. And as habits and occupations are very slowly changed, 
and climate suffers scarcely any alteration, the commodities which 
are necessary to the different classes of the inhabitants of a 
given district may, and generally do, remain for centuries un- 
changed, while their Decencies and Luxuries are continually 
varying. 

"Among all classes, the check imposed by an apprehended 
deficiency of mere Luxuries is but slight. The motives, perhaps 
we might say the instincts, that prompt the human race to mar- 
riage, are too powerful to be much restrained by the fear of losing 
conveniences unconnected with health or station in society. Nor 
is Population much retarded by the fear of wanting merely Neces- 
saries. In comparatively uncivilized countries, in which alone, as 
we have already seen, that want is of familiar occurrence, the 
Preventive check has little operation. They see the danger, but 
want prudence and self-denial to be influenced by it. On the 
other hand, among nations so far advanced in civilization as to be 
able to act on such a motive, the danger that any given person 



150 THE THEOEY OF RENT. 

or his future family shall actually perish from indigence, appears 
too remote to afford any general rule of conduct. 

" The great Preventive check is the fear of losing Decencies ; 
or, what is nearly the same, the hope to acquire, by the accumu- 
lation of a longer celibacy, the means of purchasing the Decencies 
which give a higher social rank. When an Englishman stands 
hesitating between love and prudence, a family actually starving 
is not among his terrors ; against actual want, he knows that he 
has the fence of the poor-laws. But however humble his desires, 
he cannot contemplate without anxiety a probability that the in- 
come which supported his social rank while single may be insuffi- 
cient to maintain it when he is married ; that he may be unable 
to give to his children the advantages of education which he en- 
joyed himself j in short, that he may lose his caste. Men of more 
enterprise are induced to postpone marriage, not merely by the 
fear of sinking, but also by the hope that, in an unencumbered 
state, they may rise. As they mount, the horizon of their ambi- 
tion keeps receding, until sometimes the time has passed for 
realizing those plans of domestic happiness which probably every 
man has formed in his youth." 



CHAPTER IX. 

THE THEORY OP RENT. 

Rent is the compensation paid to the landlord for permission to 
hold and use a certain portion of land. As the real ownership is 
sometimes divided between several parties, — for instance, between 
the government, the nominal landlord, and the occupier, — several 
sorts of Rent have come to be distinguished from each other, and 
called by different names. Moreover, Rent was not always paid 
in money, but sometimes by rendering military services, sometimes 
by performing menial or agricultural labor, and sometimes in kind, 
— that is, by a given portion of the actual products of the soil. 
A fixed charge payable annually forever, without regard to the 
greater or less productiveness of the soil, is more properly consid- 
ered as a case of coproprietorship than of Rent ; the owner of one 



THE THEOKY OF RENT. 151 

undivided fourth of the property, for instance, instead of receiving 
each year one fourth of the net annual product, whatever it may 
be, may have this share commuted into a fixed sum payable annu- 
ally forever, such payment being then called a Rent-charge. So, 
also, when the government is sole owner or a coproprietor of the 
soil, what it annually receives is more properly regarded as a tax, 
than as Rent. A land-tax not liable to be altered in amount — ■ 
and such is the case with the land-tax in England — is properly a 
Rent-charge. 

A quit-rent is a fixed sum, — usually but a small part of the 
net annual product, — annually paid by the possessor, as one of 
the coproprietors, to his feudal lord as the other coproprietor. It 
is so called because it quiets the claim of the lord, or makes the 
occupier quit of him. The labor, whether fixed or indeterminate 
in amount, due to the lord from servile cultivators of the land, 
might be called a serf-rent, as it was really a compensation for the 
serfs tenement or holding of gi'ound, or for his right of subsistence 
on the estate to which he was attached. Metayer rent is a divi- 
sion of the actual products of the farm between the cultivator and 
the land-owner, such as is practised in Tuscany and other portions 
of southern Europe ; it corresponds to our New England mode of 
letting a farm " on shares." Rack-rent is the largest sum that can 
be obtained for the annual hire of the land, when it is offered to 
tenants in free competition, as by auction. 

Cottier rents are paid in Ireland by peasant farmers, who hire 
small patches of land, each being barely sufficient for the subsis- 
tence of a single family ; and even these small parcels of land, 
except where the custom of tenant-right prevails, are usually rack- 
rented. The conacre is a patch of land ah-eady manured, which 
the Irish agricultiu'al laborer is allowed by the farmer to cultivate 
for the season, on paying therefor a Rent of several pounds an 
acre, this Rent being worked out in labor at a money valuation. 
Ryot-rent is the portion of the annual product which, in India, is 
paid by the peasant cultivator to the sovereign, as the proprietor of 
the ground. Farmer-rent, which is the usual meaning of the word 
rent in England, is the covenanted annual sum paid to the land- 
lord by one who furnishes all the capital, and employs all the 
laborers, for cultivating a tract of land varying in size from a 
dozen, up to two or three thousand, acres. It should be added 



152 THE THEORY OF RENT. 

that, in England, the word farmer means one who pays Rent for 
the land that he cultivates ; while, in this country, it means one 
who cultivates his own land. Ground-rent is paid in cities and 
towns for building-lots, when mere space or room is wanted, the 
C[uality of the soil being a point of no importance. 

The supposition, which is the basis of Ricardo's theory, that the 
occupier is free to remove from bad to good, or from dearer to 
cheaper land, is true only in a few of these cases of Rent. In 
forming his theory, Ricardo had almost exclusive reference to the 
•farming system of England, and regards the farmer as a capitalist 
who looks only for a due return of profits upon his investment. 
From the whole sum paid to the landlord, he deducts ordinary 
profits on all the capital ever laid out in permanent improvements 
on the land ; and the remainder he considers to be Rent properly 
%o called. According to this view. Rent is what is paid for the 
original and inherent powers of the soil, before any capital is laid 
^ut upon it, or any labor bestowed on its cultivation. But in 
the case of most farming-land, it may be doubted whether, after 
*uch a deduction of profits, there would be any remainder ; that 
is, in Ricardo's sense, whether the land yields any Rent. ' Ordi- 
nary tillage-land may be regarded as originally nothing but a 
matrix for the investment of labor and capital. Reckoning up the 
whole cost of first clearing the groimd, draining it, carrying off 
rocks and stones, transporting to it soil and mineral manures, 
fencing it and planting trees, building farm-houses, etc., it would 
probably be found that ordinary profits on the total of these ex- 
penditures would absorb the whole sum now paid annually for the 
use Df the farm. But the theory in question needs to be explained 
and tested at greater length. 

The entire science of English Political Economy may be said to 
be built upon three leading theories ; — that of Adam Smith con- 
cerning Free Trade, that of Malthus in regard to Population, and 
that of Ricardo in regard to Rent. They are intimately con- 
nected with each other ; and a full appreciation of the mixture of 
truth and falsehood which they contain would tend to clear the 
science of its local, English character, and to fit it for universal 
acceptance and utility. Having considered the first incidentally, 
and the second at some length, we may pass to an examination of 
Ricardo's doctrine. 



THE THEORY OF RENT. 153 

The permanent or average value of everything not limited 
in quantity depends on its Cost of Production, that is, on the 
amoimt of labor required to produce it. But the Cost of producing 
some commodities cannot always be reduced to the same uniform 
standard : a few persons may enjoy certain facilities, some peculiar 
implements or patented machinery, which other persons cannot 
obtain, and by the aid of which they can produce the article at 
less cost, or with a smaller amount of labor. They cannot, how- 
ever, thus produce enough to satisfy the whole Demand ; and 
therefore, other persons must produce some at the expense of more 
labor. In such a case, the Price of the commodity will be deter- 
mined by the cost o^ that portion which is produced with the greatest 
difficulty ; for, unless the Price indemnified these producers, they 
would give up the business, and the necessary amount of the ai'ti- 
cle coiUd no longer be had. But the Price having risen to this 
point, the persons producing the article more easily, by the aid of 
a machine or implements of which they have a monopoly, would 
receive an extraordinary profit. This whole extra profit may be 
called Rent, a phrase which obviously includes the profits of a 
patentee of a useful machine, as well as those of a landholder. If 
the land or the machine wei'e not subject to monopoly, — if it did 
not have a scarcity- value, — no Rent would be paid for the use of 
it, any more than for the use of the ocean. 

The produce of laud, according to Eicardo, is obtained under 
circumstances precisely analogous to those here supposed. The 
supply of gi-ain or cattle may be indefinitely increased, by employ- 
ing more capital and labor ; but it cannot always be increased in 
the same proportion to the capital and labor expended. In the 
manufacture of cottons, woollens, and silks, double the capital, and 
you will usually double the amount produced. But in agriculture, 
this is not the case. The most eligible land is first taken up, — 
either that which is most fertile, or that which is nearest to mar- 
ket, or both. We will call this portion land of the first class. For 
a while, this produces enough to satisfy the demand. But as the 
Population increases, more grain is called for ; and, because there 
is no more land of the first class to be had, the producers are 
obliged to take land of the second class, either that which is less 
fertile, or farther from market, or both ; the demand having pre- 
viously outrun the supply, the Price has risen enough to remu- 



154 THE THEORY OF BENT. 

nerate them for employing capital and labor on this lesa promising 
soil. For a while, this additional supply suffices ; but then Popu- 
lation again advances, the demand for food is increased, the Price 
rises again, and as a necessary consequence, land of the third class 
is brought into cultivation. And so on, indefinitely. At each 
step, there is a necessary enhancement of Price, and therefore of 
Profit, to those who work the land of higher quality, or of more 
easy access. The Price of the grain and cattle which are brought 
to market must always be high enough to pay those who work the 
poorest land in use ; otherwise, they would quit the employment, 
and the land would fall out of cultivation. But this Price, of 
course, will give a larger profit to those who hold the land of the 
next higher class, and a still larger one to the owners of land of 
the first class. And as still inferior lands come into use, these 
profits must become yet larger. The result is, that the amount 
of Rent for land must always depend on the degree of superiority 
of that land over the least fertile,- or least eligible, ground which is 
cultivated at all, and which, because it is the poorest, yields no 
Rent at all. 

By the original constitution of nature^ land is of various degrees 
of productiveness. One acre, with a certain quantity of labor be- 
stowed upon it, will yield forty bushels of wheat; another acre, 
with the same amount of labor, will yield but thirty bushels ; a 
third acre, still requiring the same labor, gives but twenty bushels. 
Now, suppose that these three acres of land constitute the whole 
stock of a family of .persons living upon an island of this extent, 
and cut off from intercourse with the rest of the world by the in- 
tervention of a wide waste of ocean, and by their lack of ships or 
boats. If this family consisted of but five persons, we may sup- 
pose that one acre wovild furnish them grain enough, and, of 
course, they would choose the most productive land. There being 
land, of this quality, enough for all, no portion of it would yield 
any Rent. 

But if three persons should be added to their number, there 
would be a necessity of cultivating the next best acre of land ; and 
to the persons undertaking to cultivate it, it would amount to the 
same thing whether they took without Rent the land yielding 
thirty bushels to the acre, or paid a Rent, equal in value to ten 
bushels of grain, for the land producing forty bushels to the acre. 



THE THEOKY OF RENT. 155 

The increase of Population, then, rendering it necessary to have 
recourse to land of inferior fei-tility, would cause land of the first 
class to pay Rent ; and this Rent would be exactly proportioned 
to its degi-ee of superiority over the worst land in cultivation, 
which yields no Rent. A farther accession of thi-ee individuals 
would oblige the community to till the third acre, which yields 
but twenty bushels ; and one might have his choice between tak- 
ing this laud without Rent, or paying ten bushels a year for land 
of the next best quality, or twenty bushels a year for the most 
fertile spot. Always the worst land in cultivation pays no Rent ; 
and all other land pays Rent in proportion to the degi'ee of its 
superiority over this poorest land. 

Natural fertility is but one of the circumstances that give value 
to land, or cause it to pay Rent ; nearness to market, or any 
other natural quality, operates in precisely the same way. If all 
the laud produces the same quantity to the acre, and if the pro- 
duce of one acre can be sold on the spot, while it costs the value 
of ten bushels of grain to carry the produce of the second acre to 
market, and of twenty bushels to transport that of the third acre, 
then the first acre will bear a Rent of twenty bushels, the second 
a Rent of ten b\Tshels, and the third no Rent at all, because 
it produces only enough to pay ordinary Wages and Profits, 
— there is no sm-plus for Rent. The increased demand of 
towns, occasioned by the increase of their Population, not only 
tempts the cultivators in their vicinity to improve their lands 
more highly, but fi-equently causes large portions of their supplies 
to be brought from a great distance. Hence it sometimes happens 
that the advantage of vicinity more than counterbalances the dis- 
advantage of comparative barrenness, so that lands of inferior 
fertility, in the immediate environs of a large town, yield a con- 
siderable Rent, while much richer land, at a distance from good 
markets, yields little or perhaps no Rent. As vicinity to a town 
is a cause of Rent, so vicinity to a road, navigable river, or canal, 
by diminishing the expense of can-iage to some great market, may 
have a similar effect. 

Observ-e, also, that the theory still holds good, whether the 
increase of Population constrains us to take poorer or more distant 
land, hitherto neglected, into cultivation, or to expend more capi- 
tal and labor upon the land already in tillage, with a view of 



156 JTHE THEORY OF RENT. 

increasing its product. For the additional capital thus invested 
will not yield a return proportionally great with that of the capital 
which was first employed. If, for instance, the first thousand dol- 
lars spent upon a farm will cause it to yield at the rate of thirty 
bushels to the acre, the expenditure of a second thousand dollars 
upon it may raise the crop, perhaps, to forty bushels per acre ; 
but it certainly will not double the crop, or make the yield to be 
sixty bushels, as it ought to do if the second application of capi- 
tal were equally remunerative with the first. Then the second 
application of capital will not be made till the increase of Popula- 
tion has caused the Price of grain to rise so high, that this second 
thousand dollars will produce as large profits as capital applied in 
other ways. And when this second thousand dollars will yield 
ordinary profits, it is obvious that the first thousand dollars, ap- 
plied under circumstances much more advantageous, will yield 
much more than the ordinary profits. The diiference between 
these two rates of profit is the Rent of the land. Thus, always, 
just as there are more mouths calling for more food, either 
poorer or more distant land must be taken into cultivation, or 
more capital must be applied with perpetually diminishing returns, 
or at rates of profit growing successively less and less. 

It is true, as the theory admits, that the necessity of having re- 
course to inferior lands, or of applying more capital with constantly 
diminishing returns, is postponed by the improvements that are 
made, from time to time, in the tools and processes of agriculture, 
which enable us to obtain more food from the same quantity of 
land without a proportionate increase of capital or industry. But 
the evil day is thus only postponed, not entirely removed. It is 
impossible that agricultural improvements should keep pace for 
any long time with the increase of the Population ; for they are 
limited in their nature and extent, while the prolific power of the 
human race is unbounded. These improvements also, by lessen- 
^ ing the price of food, stimulate the increase of numbers, and thus, 
in one way, tend to increase the evil, which they do but partially 
check in another. When the Price of corn is reduced, through 
improvements in agriculture, says McCuUoch, "all classes obtain 
greater quantities than before in exchange for their products or 
their labor; hence the rate of profit, and consequently the accumu- 
lation of capital, are both increased ; and this increase, by causing 



THE THEOKY OF RENT. 157 

a greater demand for labor, and higher wages, leads, in the end, to 
an increase of Popvilation, and, consequently, to a further demand 
for raw produce, and an extended cultivation. Agricultural im- 
provements obviate, sometimes for a lengthened period, the neces- 
sity of having recourse to inferior soils ; still, however, their 
influence in this respect cannot be permanent. The stimulus 
which they, at the same time, give to population, and the natural 
tendency of mankind to increase up to the means of subsistence, 
.are sure, in the long run, to raise prices, and, by forcing recom-se 
to poor lands, Rents also." 

This is a brief, but, I hope, suflftciently clear and fair exposition 
of Ricardo's celebrated theory of Rent. I call it Ricardo's theory, 
though it was first promulgated by Dr. Anderson, of Scotland, as 
early as 1777. It then attracted hardly any notice, and was sub- 
sequently forgotten. It was afterwards rediscovered, almost si- 
multaneously, by Sir Edward West and Mr. Malthus, while Mr. Ri- 
cardo has most sucessfuUy developed it, applying it to the theory 
of Profits, and to the solution of many other problems in Econom- 
ical science. Malthus was certainly put upon the track of it by 
his own theory of Population, of which it is an obvious supple- 
ment. As it might be objected to the Malthusian doctrine, that 
the danger which it contemplated was prospective and distant, the 
world certainly not being overpopulated as yet in aU its parts, 
this theory of Rent comes in to fill up the deficiency in our her- 
itage of woe, and to prove that the increase of Population, to which 
the human race is always tending, is always an evil ; — that, for 
every new life which is created, some new restraint, privation, or 
loss is imposed upon those already in being. " Granted," these 
prophets of evil may exclaim, " that there is not as yet an abso- 
lute deficiency of food ; yet every birth tends to raise the price of 
the stock of sustenance which we have, because it obliges us to 
cultivate stiU poorer land, and to apply labor and capital with 
constantly diminishing retiu-ns, — or to work at smaller Wages, 
and apply capital at smaller Profits." Mr. Mill states the legiti- 
mate inference from these two theories of Popiilation and Rent 
clearly and strongly, when he says, that " a greater number of 
people cannot, in any given state of civilization, be collectively so 
well provided for as a smaller." 

I do not accept these gloomy views of the course of nature and 



158 THE THEORY OF RENT. 

of Providence. I do not believe that any increase in the number 
of the civilized, Christian inhabitants of the earth is an evil, or 
that it entails any evil upon coming generations. The social evils 
which now unquestionably exist, and which are traced by such 
Economists as Malthus, Ricardo, and McCulloch, to an excess of 
population, appear clearly imputable to defective, unnatural, and 
unjust institutions of man's device, and admit of remedy without 
shaking the pillars of social order, or impiously calling on God to 
send war, inundations, or pestilence, wherewith to scourge man- 
kind into a sense of their duty to restrain their natural inclina- 
tions, and destroy the sources of domestic happiness. Having 
established these points against the doctrines and the calculations 
of Malthus, I proceed to show that there is nothing in this theory 
of Rent which ought to shake our confidence in them. 

And first, I would call attention to the fact, that both these 
theories are of English origin, and were first suggested, as is obvi- 
ous, by observation of those evils in the social condition of Eng- 
land, which only within the present centmy have become of crying 
magnitude. These evils have manifested themselves in the only 
country in Europe in which all the land, the great food-producing 
machine, has come to be owned by so small a class, that the great 
body of the community seem to have no part or lot in it ; while, 
at the same time, those ancient patriarchal and religious institu- 
tions, which certainly did much to mitigate the eifects of an undue 
aggregation of landed property in the hands of a few, have entirely 
died out or been destroyed. It is the boast of the English, that 
the relations of vassal and lord, clansman and chieftain, serf and 
master, no longer exist among them. The English barons no lon- 
ger support each an army of retainers to be their followers in war, 
and to keep up their feudal state. English prelates and monks no 
longer dispense open-handed hospitality and charity at the gates of 
richly-endowed monasteries. These institutions of the Middle Ages 
have been destroyed in England, root and branch ; but their fall 
has not, as in many parts of the Continent, caused the landed 
property once aggregated in their support to be parcelled out 
again, with great minuteness and some approach to equality, 
among those who were formerly maintained by it in rude plenty, 
though not in peace or perfect freedom. Feudal relations have 
been done away, but the magnitude of feudal estates has not been 



THE THEOKY OF RENT. 159 

diminished. The Highland chieftain has banished his clansmen 
from their hei'editary possessions and hereditary dependence on 
him, has compelled them to emigi-ate or starve, has turned his 
vast Highland estate into sheep walks and deer-pai-ks, and has him- 
self become a wealthy English nobleman. A cool pecuniary calcu- 
lation of profit and loss has induced him to take this step. The 
same motive has caused the gi'eat English landholders to depopu- 
late their estates, driving the rural tenantry into the towns and 
manufacturing districts, where they must become operatives or 
paupers. The consequence of this aggregation of landed estates, 
and this mode of deriving the largest possible Rent from them, has 
been a fearful increase of pauperism, and a general apprehension 
lest the tax for the support of the poor should become so large as 
eventually to beggar the rich also. 

Systems and theories of Political Economy suggested by cir- 
cumstances so anomalous and peculiar as these, or contrived with 
a view to explain and justify them, are not likely to be applicable 
to other countries, or to contain many general truths. England is 
the only country in the world in which the laboring class is en- 
tirely dependent on the wages of hired labor : on the Continent, in 
most instances, they have a small property on which they can sub- 
sist, though poorly, in seasons when they cannot add to their 
scanty incomes a small amount of Wages by obtaining employment 
elsewhere for time not needed at home. If they have not a 
little land which is entirely their own, they have a sort of pre- 
scriptive right to cultivate the land of others, on certain fixed 
terms, either as metayers, giving all the labor for a portion of the 
produce, or as feudal siibjects bound to the soil, and having a 
right of maintenance from it. In neither case are they driven 
into the labor-market as their only refuge from starvation, there 
constantly to depress wages by their frantic competition for em- 
ployment, or to give up the struggle in despair by throwing them- 
selves upon compulsory public charity. 

Ricardo's theory of Rent was discovered or invented with ref- 
erence to the anomalous state of things in England. It is an 
attempt to establish as a law of nature the alleged fact, that an 
increase of the numbers of a people, under any circumstances, is an 
evil, because it creates an additional demand for food, which can 
be met only by having recourse to poorer or less advantageously 



160 THE THEOKY OF EENT. 

situated soils, or by applying more labor and capital, with constant- 
ly diminishing returns. It is abundantly confuted by facts, and 
can easily be shown to be unsound in principle. The assertion of 
Mr. Mill, " that a greater number of people cannot collectively be 
so well provided for as a smaller," becomes absurd when applied 
to an infant colony, established in a vast territory, on a virgin 
soil. Who can seriously maintain, that an increase of Population 
is an evil in British Australia, or in the great valley of the Missis- 
sippi 1 It might as well be said that the people of Ohio, Indiana, 
and Wisconsin are straitened for want of room, as that their 
proportionate supply of food is lessened by the increase of their 
numbers. Among them, surely, it is apparent that an increase of 
Population is an increase of productive power, and hence a pro- 
portionate increase of the surplus of grain and other articles of sus- 
tenance, which, after satisfying all their own wants in the amplest 
manner, they are able to send off to satisfy the wants of other 
nations. The average price of flour in the Philadelphia market, 
between 1800 and 1810, exceeded eight dollars a barrel ; from 1810 
to 1820, the average was about nine dollars. The population of 
this country in 1800 was but little over five millions; in 1820, it 
was somewhat less than ten millions. It is now more than forty 
millions. And is the nation, in consequence of this vast increase 
of numbers, less bountifully supplied with food ? On the contrary, 
the price of flour and other breadstuff's has greatly diminished, 
and we are supplying the world with them. The average price of 
flour in 1869 was less than six dollars (in gold). 

Our export of breadstuff's and other articles of food in 1868 ex- 
ceeded 100 millions of dollars in value ; and in case of any failure 
of the crops in Europe, it could probably be raised to 130 millions, 
without materially lessening the enjoyments of the people of this 
country, or raising the price of grain to a point beyond the reach 
of the poorest class of the population. Do these facts afford any 
evidence that the forty millions, who now constitute the American 
nation, are not so well provided for as the five millions who occu- 
pied their place only seventy years ago 1 Are they not rather a 
demonstration of the principle that the increase of numbers is an 
increase of productive power, and a consequent proportionate in- 
crease of the means of subsistence, — of the necessaries, comforts, 
and luxuries of life 1 



THE THEORY OF RENT. 161 

But it may be said that America is an exceptional case, and that 
we have no right to argue from the fortunate circumstances in 
which we are placed to general conclusions w-hich would be wholly 
inapplicable in other portions of the world. We answer, that the 
facilities afforded by commerce now really connect all the civilized 
nations of the earth into one great community, the supply of all 
articles being made everywhere proportionate to the demand and 
to the ability to pay for them. Grain and other articles of pro- 
vision are matters both of foreign and domestic traffic ; every 
country can obtain an abundance of them, though her own soil 
may be entirely barren. Great Britain has no difficulty in obtain- 
ing a supply of cotton, though the cotton-plant will not grow in 
the British Isles. Grain and other provisions can be purchased 
even with gi'eater facility than cotton and tobacco, or coffee and 
tea ; for these latter articles can be raised only in a few favored 
countries, while the market of the whole world is open for the sale 
of food. It is found more profitable to devote the larger portion of 
the labor of the British Empire to commerce and manufactures, 
and to buy a portion of the food that is required, than to cultivate 
the soil to the full extent of which it is capable, and thereby raise 
the whole stock of provisions. If a given amount of labor employed 
in spinning yarn and weaving cloth will produce enough value to 
buy and import two bushels of grain, while, if devoted immediately 
to tilling the ground, it will raise only one bushel, it is certain 
that the labor will be given to manufactures, and not to agricul- 
ture ; and the deficiency of food thus created (if it can be called a 
deficiency) will afford no reason for impeaching the bounty of 
Providence, and no cause for fear lest the increase of the Popula- 
tion should outstrip the increase of the supply of food. 

We say, then, that this theory of Picnt, being inapplicable and 
unsound in the case of America, is consequently untrue in its appli- 
cation to Europe generally, and even to England. An increase of 
the English population does create a larger demand for food. But 
this demand does not oblige the people to have recourse to the 
poorer soils in order to enlarge the crops, nor even to apply more 
capital with less profit to the soil already under tillage ; it simply 
obliges them to import more food from America and the countries 
ou the Baltic and the Black Sea. And the supply which these 
countries may afford is indefinite ; the only reason why they do 
11 



162 THE THEORY OF EENT. 

not now send more com to England, is that England needs no 
more. The possible supply of wheat and maize from the back 
country of the United States defies all calculation ; it is kept 
dammed up there now, because the producers know, if it were 
thrown upon the market at once, that it would sink the price 
below the cost of production. But, because it exists in excess, if 
the capacity of the market were increased the supply might be 
indefinitely enlarged, without any material or even perceptible 
enhancement of price. There is no more risk that our back 
country will be drained of wheat, than that the great Mississippi 
will drain it of water. 

Thus much for the contradiction of the theory by the facts in 
the case. The refutation of it in principle, or by abstract reason- 
ing, is equally easy. 

And first, it is to be observed that the natural fertility, or what 
Ricardo calls the original and inherent powers of the soil, as an 
element of Rent, are wholly insignificant in comparison with near- 
ness to market. The most barren soils in the world, even hard 
rock, pure sand, or stagnant marsh, should a populous and wealthy 
city spring up in the neighborhood, will yield Rent, often a large 
Rent, because they afford a field which human industry and skill 
can convert into a productive garden. On the other hand, soil of 
the greatest natural fertility, if it be far distant from any market 
for agricultural produce, will command no Price and yield no Rent. 
For instances of the former class, take the larger portion of the 
soil of Belgium and Holland, much of which has been literally re- 
claimed from the sea. Yet these broad districts of sea and sand 
are now the gardens of Europe, shaming even the wonders of Eng- 
lish farming by the fulness of their crops. Two and a half acres 
of thein yield food enough for a family of five persons. 

For examples to corroborate the other branch of the statement, 
we have only to look at the remote West of our own fair land. 
Thousands of square miles of the most productive land in the 
world, in Kansas and Nebraska, are even now lying tenantless, 
because they will not command the government price of only $1.25 
an acre. And even in the more thickly settled States of the great 
Mississippi valley, many a broad region yet remains waste in the 
ownership of the government, far superior in natural advantages 
to the soil of Belgium in its original condition, and for which, not- 



THE THEORY OF RENT. 163 

withstanding, no one will give this almost nominal price. The 
reason is, that thei'e is not market enough in the neighborhood to 
take off the surplus agricultural produce. If the population 
should increase in numbers, so as to requii'e more food, even 
though the price of the food should not be increased, this waste 
land would soon be purchased and reduced to tillage. 

This point being established, then, — that the original fertility 
of the soil is an element of little or no impoi'tance in the theory of 
Rent, — we have only to consider that portion of Ricardo's doc- 
trine which relates to comparative distance from the market. He 
maintains that land bears Rent in proportion to its nearness to 
the place where agi'icultural produce is needed and consumed; 
and that the increase of population, consequently, is an evil, be- 
cause the community are obliged to send farther and farther off 
for their supplies. Here is the great and obvious fallacy, — of 
supposing that the population, as it increases, necessarili/ remaiiis 
stationary, or on the same spot, so that the grain must be brought 
to it at a price enhanced by the cost of transportation. We 
answer, that, instead of the food coming from a distance to the pop- 
ulation, the pojndation go to the food. The nation expands over 
more space as it increases in numbers. The tide of emigi'ation 
sets towards the unoccupied lands in a current the velocity and 
depth of which are proportioned to the increase in the number of 
the people. The new-comers, the addition to the nation, instead 
of raising the price of food for themselves and their predecessors, 
actually cheapen it. As they spread themselves over the waste 
lands, and reduce them to cultivation, they not only raise food 
enough for themselves, but they increase the surplus which is sent 
to market, to be there exchanged for manufactm-es and the pro- 
duce of foreign climes. 

This is exemplified in the recent history of New England. 
The average rate of increase of the population here, dm-ing the 
last forty years, has been less than 16 per cent for every ten years, 
while for the whole United States it has been about 34 per cent, 
or over twice as large. Why is this, since the excess of births 
over deaths is about as great in New England as in any other 
portion of the country] The answer is obvious. One half of 
those who are born here, and survive to the age of maturity (one 
half of the surplus, I mean, over those who are needed to com- 



164 THE THEORY OF EENT. 

pensate for the deaths), emigrate to the West, and there take their 
part in settling the wild lands and reducing them to tillage. And 
so successful have their labors been, that the price of grain and 
other agricultviral produce has not risen in proportion to the in- 
crease of our numbers, as it ought to have done if Ricardo's the- 
ory were true, but has fallen since 1830, though since that time 
our population has been more than tripled, and though our expoi'ts 
of provisions also have increased to an immense extent. 

We come, then, to a theory of Rent which differs very widely 
from that of Ricardo. Rent depends, not on the increase, hut on 
the distribution, of the population. It arises from the excess of the 
local demand over the local supply, and is therefore ultimately 
determined by the expense and inconvenience of bringing the food 
from a distance, or by the discomforts and privations which attend 
the removal of a portion of the people to a new home. The mi- 
gration is not necessarily directed to another country ; the more 
remote and less populous counties or States may receive the sur- 
plus population of the metropolitan region and the manufacturing 
districts, and an additional supply of food will then be obtained 
from the agricultural labor of those who have thus found a new 
home. 

An increase in the numbers of the people may thus be followed 
by more than a proportional increase of the means of subsistence. 
The price of food, then, will not vary in proportion to the Rent ; 
on the contrary, the Rent may increase indefinitely while the 
price of food is diminishing. A livelihood may be more easily and 
cheaply obtained by commercial or manufacturing industry in a 
great city or a populous region, notwithstanding the considerable 
outlay required for Rent, than by tilling the ground in a district 
where land may be hired for a trifling sum, or even purchased at 
a nominal price ; and still the extension of agriculture may be so 
great, as the forest is cleared up and the prairie planted, that corn 
and flour may be bought by the inhabitants of cities more cheaply 
than ever. 

Not only in America, but in Great Britain and Ireland, and 
indeed throughout the civilized world, it is notorious that Rent is 
produced and increased, or, in other words, that value is given to 
the land, by creating a market for agricultural produce in the 
neighborhood of the land whence that produce is obtained ; that 



THE THEORY OF RENT. 165 

is, by collecting a town oi* civic population, engaged in manufac- 
tures and commerce, who have the means to buy the wheat. By 
collecting such a population, I say; not by creating one, or by mak- 
ing the total number of the whole people larger, as Ricardo's 
theory requires. It is not the demand for a larger supplj^ of food, 
but the altered locality of the demand, and the altered habits and 
occupations of the people, which swell the value of the land and 
enhance the Rent. 

And, conversely, the population might be considerably enlarged, 
and more food consequently be required, at the very time when 
Rents were falling throughout the country. This would be the 
case if the process of dispei-sion should be going on at the same 
time, — the people leaving the manufacturing towns, and spread- 
ing themselves over the country, so that each family would come 
nearer the particular spot of land that feeds it. This is the evil 
often experienced here in America, where several towns and 
smaller cities upon the Atlantic coast, which were prosperous and 
wealthy up to the close of the war in 1815, have since ceased to 
advance, and even retrograded, in riches and population. Many 
of their citizens joined the great migration to the Western States, 
because the policy of the national government was no longer fa- 
vorable to manufactures, the fisheries, and commerce. Of course, 
as these towns dwindled, the Value and the Rent of farms in their 
immediate vicinity were also depressed, and agi-iculture, instead of 
advancing, visibly retrograded, the prices of all kinds of rural 
produce being kept down by the abundant supplies which began 
to arrive from the newly cleared regions at the West. Yet, all 
this while, the total population of the United States was increas- 
ing with unparalleled rapidity, and, if Ricardo's theory were true, 
Rent ought to have advanced pari jjassu. 

To illustrate the opposite result, — the rise of Rents and of 
the prices of agricultural produce produced by the concentration 
of the people in manufacturing districts and towns, — I might 
refer to such obvious instances as the neighborhood of Lowell in 
Massachusetts, Manchester in New Hampshire, Rochester in New 
York, Pittsbm-gh in Penns^dvania, and many others, the rapid and 
immense increase of which in population and wealth seems almost 
fabulous. It is the rapidity of this increase, indeed, which proves 
that the result is attributable to bringing the people together, and 



166 THE THEOEY OF EENT. 

not to the natural growth of the total population. It cannot have 
been merely from the increased number of births, that Rochester, 
for instance, which had a population of only 1,500 in 1820, num- 
bered over 9,000 inhabitants in 1830, over 20,000 in 1840, and 
over 36,000 in 1850 ; or that Lowell, whose population in 1830 
was about 6,500, numbered over 33,000 in 1850. For illustra- 
tions from Great Britain, in which country alone does Ricardo's 
theory of Rent seem even plausible, I need only bring together a 
few passages from an able essay by a French writer, M. de 
Lavergne, on the " Rural Economy of England." 

Up to the time of Arthur Young, he says, " the English farm- 
ers had, like all those of the Continent, worked with little view to 
a market. Most agricultural productions were consumed on the 
spot by the producers themselves ; and although in England more 
was sold for consumption beyond the farm than anywhere else, it 
was not export which regulated production. Arthur Young was 
the first who made the English agriculturists understand the 
increasing importance of a market ; that is to say, the sale of 
agricultural produce to a population not contributing to produce 
it. This non-agricultural population, which up to that time was 
inconsiderable, began to develop ; and since then its increase has 
been immense, owing to the expansion of manufactures and com- 
merce. Everybody knows what enormous progress the employ- 
ment of steam as a motive powder has effected in British manufac- 
tures and commerce during the last fifty years. The principal 
seat of this amazing activity is in the northwest of England, the 
county of Lancaster, and its neighbor, the West Riding of York- 
shire. There Manchester works cotton, Leeds wool, Sheffield iron, 
and the port of Liverpool, with its constant current of exports and 
imports, feeds an indefatigable production." 

" One third of the English nation is concentrated on these two 
points, — London in the south, and the manufacturing towns of 
Lancashire and the West Riding in the north. These human 
ant-hills are as rich as they are numerous. What becomes of the 
immense amount of wages paid to this mass of workmen every 
year] It goes, in the first place, to pay for meat, beer, milk, 
butter, cheese, which are directly supplied by agriculture, and 
woollen and linen clothing, which it indirectly furnishes. There 
exists, consequently, a constant demand for productions, w^hich 



THE THEORY OF EENT. 167 

agriculture can hardly satisfy, and which is for her, in some 
measure, an unlimited source of profit. The power of these out- 
lets is felt over the whole country ; if the farmer has not a man- 
ufacturing town beside him to take off his produce, he has a port j 
and should he be distant from both, he brings himself into con- 
nection with them by canal, or by one or more lines of railway." 
Such is the influence, upon production, of an inexhaustible outlet, 
that these fields are rented at an average of 30 s. ($ 7), and in the 
immediate environs of Liverpool and Manchester, arable land 
lets as high as £4 ($20) an acre. There are not many soils in 
the most sun-favored lands which can boast such rents. 

" It is pretty generally believed that pauperism prevails more 
in the manufacturing than in other districts. This is quite a mis- 
take." It appears from the official returns, that in the manufac- 
turing counties " the poor's rate is about 1 s. in the pound, or 3 s. 
to 4 s. a head, and the number of poor 3 to 4 per cent of the pop- 
ulation ; whilst in the agricultural counties it exceeds 2 s. in the 
pound, or 1 s. a head, and the number of paupers is from 13 to 16 
per cent of the population. The cause of this difference is easily 
understood ; — the number of paupers and the cost of their main- 
tenance increases as the rate of wages becomes lower. Although 
the working population be three or four times more dense in the 
manufacturing than in other parts of the country, its condition 
there is better, because it produces more." 

" If we transport ourselves to France, to the most backward 
departments of the centre and south, what do we there find 1 A 
thinly scattered population, — at the most, not exceeding on an 
average one third that of the English, — one head only, in place 
of three, to five acres, — and that population almost entirely agri- 
cultural ; few or no large towns, little or no manufactures, trade 
confined to the limited wants of the inhabitants ; the centres of 
consumption distant, means of communication costly and difficult, 
and expenses of transport equal to the entire value of the produce. 
The cultivator has little or nothing to dispose of Why does he 
work 1 To feed himself and his master with the produce of his 
labor. The master divides the produce with him, and consumes 
his portion ; if it is wheat and wine, master and metayer eat wheat 
and drink wine ; if it is rye, buckwheat, potatoes, these they con- 
sume together. Wool and flax are shared in like manner, and 



168 THE THEORY OF RENT, 

serve to make the coarse stuffs with which both clothe themselves. 
Should there happen to remain over a few lean sheep, some ill-fed 
pigs, or some calves, reared with difficulty by over-worked cows, 
whose milk is disputed with their offspring, these are sold to pay 
taxes. 

" In this state of things, as there is no interchange, the culti- 
vator is obliged to produce those articles which are most necessary 
for life, — that is to say, the cereal grains : if the soil yields little, 
so much the worse for him ; he has no choice, he must produce 
corn or die of hunger. Now, on bad land, there is no more ex- 
pensive cultivation than this ; even on good, if care is not taken, 
it soon becomes burdensome ; but under these conditions of farm- 
ing, no one thinks of taking account of the expense. The labor is 
not for profit, but for life ; cost what it may, corn must be had, or 
at all events, rye. As long as the population is scanty, the evil is 
not overwhelming, because there is no want of land : long fallows 
enable the land to produce something ; but as soon as the popula- 
tion begins to increase, the soil ceases to be sufficient for the 
purpose ; and a time soon arrives when the population suffers 
severely for want of food." 

That Rent depends upon the distribution, and not upon the 
increase, of the population, may be easily seen by putting the ex- 
treme case. Suppose the inhabitants of a country distributed 
with perfect evenness over its territory, each family residing upon 
the centre of the spot, say ten or twelve acres in extent, which 
feeds it. While the population is small, a district of limited ex- 
tent may supply homesteads for all the inhabitants. As the 
people increase in number, suppose additional lots, upon the out- 
skirts of the former settlements, to be laid out for the new fami- 
lies. It is not necessary that the soil should be of equal fertility 
throughout the land, so that all the farms should consist of the 
same number of acres. In the more productive districts, six or 
eight acres may suffice for a family ; in the less favored ones, six- 
teen or twenty may be needed. The only essential point is, that 
each family should have enough land, and no more than enough, 
for its own wants. 

Under these circumstances, it is evident, the land would not 
yield any Rent ; — there would be enough for all. Monopoly, or 
exclusive appropriation, being impossible, a Price would no more 



THE THEORY OF EENT. 169 

be set upon the land, than upon the air or the light. No one 
would think of charging Rent, any more than of levying tolls for 
the right to cross the broad ocean. And it is conceivable, that this 
state of things should exist over the whole earth, and should con- 
tinue for many centuries to come. Islands of limited extent, like 
the British Isles, might indeed be filled up, or completely occupied, 
the people having become so numerous that no more land could 
be had for the new families. In such case, the new families would 
have to emigrate, as they are now actually obliged to do ; but they 
would find abundance of unoccupied land in America, Australia, 
and elsewhere. 

But if the population of one country, or of the whole globe, 
were thus distributed with perfect evenness, each family residing 
upon the spot that furnished it with food, though there would be 
no Rent, it is obvious that there would be little or no Division of 
Labor, and, consequently, no progress in civilization and the arts, 
and no advancement in opulence- Mankind would begin to retro- 
grade to a condition as low as that in which any portion of them 
have yet been found. The labor of for the larger portion of each 
family would have to be devoted to agriculture, in order to obtain 
the necessary sustenance from the ground ; and as the labor of the 
remaining part would not sufl5ce to renew and keep in repair the 
stock of tools, domestic utensils, and household comforts, these 
would soon be expended or worn out. As tools become imperfect 
and deficient, more labor must be given to tillage. The processes 
of agriculture would thus rapidly degenerate, till, at last, the in- 
cessant toil of the whole family would produce only a scanty 
supply of the coarsest sustenance, and, from the want of leisure, 
knowledge and civilization would die out. 

But experience even of the commencement of these evils would 
teach mankind their appropriate and easy remedy. Several fami- 
lies would unite, in order to obtain the benefits of a Division of 
Labor. Some would devote themselves exclusively to the manufac- 
ture of agricultural implements and household articles, while the 
labor of the others would supply them with food. As manufactur- 
ing operatives must work near each other, the ground originally 
allotted to a single family would come to be tenanted by many, and 
would form the nucleus of a town. But a town is necessarily a 
market for the sale of agricultural produce and the purchase of 



170 THE THEOEY OF RENT, 

manufactured commodities. From the advantages which the town 
would thus afford, the land in its immediate vicinity, being limited 
in quantity, would assume a value, or, in other words, would begin 
to yield a Rent. Only a small number of farms of the original 
size, from six to twenty acres, can have the advantage of immedi- 
ate proximity to the newly formed manufacturing village ; the 
occupants of these farms would be better furnished with tools, and 
more able to exchange their products for manufactured goods. 
The occupants of farms at a distance would be willing to purchase 
these advantages of them, — to offer two or three acres remote 
from market in exchange for one acre adjoining a town. Thus 
Rent would begin, not at all as a consequence of the absolute in- 
crease of the population, for the total population might be station- 
ary or even retrograding while these changes were going on, but 
as a consequence of the altered distribution of the people over the 
face of the country. 

The highest Rents of all are obtained from land that is not 
used for any purposes of agriculture, but only for habitation or 
manufactiiring purposes, within the limits of the cities themselves, 
— a phenomenon of which the theory of Ricardo furnishes no ex- 
planation whatever. His theory is applicable only to what may 
be called agricultural Rents ; civic Rents, the ground-rents of 
houses and shops in crowded cities, afford the best of all instances 
of Rent property so called, as they are free from the effects of 
the great disturbing cause, — agricultural improvements. These 
ground-rents do not depend upon the magnitude of the population 
of the city, or upon its rate of increase ; they rise and fall in dif- 
ferent streets, under the varying demand produced by the changes 
of business and the mutations of fashion. In London, they have 
risen enormously high in Belgravia, and fallen proportionally in 
what was the fashionable part of the metropolis a century ago ; in 
the most crowded portions of the city proper, they are probably 
no higher than they were in the time of George III., and do not 
certainly equal some in Washington Street, Boston, the population 
of which city is not one twelfth part as great as that of London. 
In the English metropolis, the population, as it increases in num- 
ber, necessarily spreads itself over more space ; and therefore it 
may be doubted whether the aggregate ground-rent of those por- 
tions of the city which were densely inhabited at the beginning of 



THE THEORY OF EENT. 171 

this century is any greatei* now than it was in 1800, though the 
population of all England meanwhile has doubled. 

In the United States, the want of local attachments and the 
restless and migratory character of the population have drawn 
attention to the fact, that Rents begin, or the land acquires value, 
as fast as the vicinity is peopled. The favorite form of specula- 
tion here, the easiest and most common mode of money-getting, is 
the acquisition of a tract of land in some neighborhood where the 
circumstances indicate that a new town or city must soon spring 
up. A fortune is thus easily acquired, as the land acquires value 
before any labor is expended upon it, and long before the necessi- 
ties of an increasing population would require it to be inhabited, or 
even cultivated. In England, the more stationary habits of the 
population have concealed this fact ; and as the land slowly rose in 
value with the advancement of opulence and the gradual increase 
in the number of the whole people, Ricardo's theory of Rent 
seemed plausible enough. Yet even in England there has been 
a regular movement of the population, a steady di'ain from 
the agricultural counties, and a filling up of the manufacturing 
districts. 

The rise of Rents, as thus explained, is no hardship for those 
who are not landholders, and does not tend to depress the laboring 
part of the population. Those who pay these higher Rents, or the 
higher prices of corn which produce them, are compensated by 
the advantages they obtain through their vicinity to a market. 
In fact, the enhancement of price for the burghers or citizens is 
merely nominal ; they obtain more, and have a readier sale, for 
the manufactured goods whidi they produce, and pay more for the 
com which they consume, the one result counterbalancing the 
other. What matters it to the laborer if he pays more Rent for 
his dwelling, and a higher price for his com and potatoes, provided 
that the additional wages which he receives are more than enough 
to meet these additional expenses 1 The positive gain to the com- 
munity consists in the saving of transportation both ways. If the 
population were not concentrated, it would be necessary to trans- 
port the agricultural produce a long distance to the town where it 
is consumed, and to carry the manufactured goods an equal dis- 
tance to the farmers who need them. Even the English Econo- 
mists admit that a great saving is effected in this respect through 



172 THE THEOEY OF EENT. 

canals, railways, and other contrivances which lessen the cost of 
transportation. Is it not still a greater saving to do away with 
the necessity of these improved means of transport, and with the 
cost of constructing them, by bringing the agriculturists and the 
manufacturers nearer to each other 1 

It is as much for the interest, then, of the farmers of the 
Mississippi Valley, as of the manufacturers themselves, that the 
American system of protection should be continued. At present, 
the value of the lands at the West is kept down by the distance 
of their produce from a market. The cost of transporting a barrel 
of flour from Cincinnati to New York amounts, at ordinary prices, 
to at least thirty per cent of its value at the former place ; the cost 
of its further transportation to Liverpool, including insurance and 
other necessary expenses, raises this proportion to about forty per 
cent. Create a manufacturing population in Ohio like that which 
exists in English Lancashire, and the price of flour at Cincinnati 
would be made equal to its price at Liverpool. Free trade between 
England and Ohio, then, means simply that Ohio produce should 
be admitted into the English ports under what we may call a 
"transportation duty" of forty per cent; while, owing to the great 
value in a small bulk, of the finer manufactures, English produce 
is to be admitted into Cincinnati at a duty of only fifteen per 
cent. In other words, the opponents of protection would persuade 
the Ohio farmer that it is better for him to buy English broad- 
cloth at $ 1.70 a yard, and sell his flour at $ 5.00, than to buy 
American broadcloth of the same quality at $ 2.00, and sell his 
flour at $ 7.00. The depression in the value of Ohio produce, 
which took place between 1847 and 1852, is clearly attributable 
to the fact, that the crowds of laborers discharged from out un- 
prosperous manufacturing establishments, and the 300,000 immi- 
grants annually landed on our shores, had been driven into 
agricidture, and had so increased the annual product of Michigan, 
Iowa, and Wisconsin, as to undersell the Ohio farmer at his own 
door. The protection of our manufactures would enlarge the 
home market for him, through the very means which are now 
swelling the number of his competitors. 



WAGES. 173 



CHAPTER X. 

THE CAUSES WHICH AFFECT THE RATE OP WAGES: WHY WAGES ARE 
NOT EQUAL IN DIFFERENT EMPLOYMENTS. * 

The doctinne of the English Economists respecting Wages may 
be easily inferrred from their two theories, already considered, 
respecting Population and Rent. Putting aside the consideration 
of Wages reckoned in money, as these are subject to merely nomi- 
nal variations, according as the value of money rises or falls, they 
say that Wages rated in commodities, or the quantity of produce 
apportioned to each laborer, is determined by the ratio which the 
capital of the country bears to its laboring population, or to the 
number of those who work for hire. By capital, however, they 
here mean " only Circulating capital, and not even the whole of 
that, but only the part of it which is expended directly in the 
purchase of labor. To this, however, must be added all funds 
which, without forming a part of capital, are paid in exchange for 
labor; such as the wages of soldiers, domestic servants, and all 
other unproductive laborei's." The aggregate of capital or wealth 
devoted to this piu-pose, to the payment of productive or unpi-o- 
ductive labor, may be termed the Wages-fund of a country; and 
the share of it which each laboi'er receives will evidently be deter- 
mined by its amount, divided by the whole number of persons 
seeking employment. 

Thus explained, the doctrine is a mere truism. We obtain no 
insight into the causes which regulate the rate of Wages, when we 
are merely told that this rate depends upon the whole sum annu- 
ally expended for Wages, divided by the number of persons who 
share this sum among them. But as it is intended to be under- 
stood, the doctrine is merely a covert statement of the theory of 
Malthus. Assuming it to be impossible, by any measure of legis- 
lation or government policy, to increase the aggregate funds 
employed in hiring laborers, it is affirmed that a "diminution in 
the number of competitors for hire " is the sole means of raising 
Wages, and that the power and responsibility are thus placed in 
the hands of the laborers themselves. If they will refrain from 
overstocking the labor-market, their condition as a class may be 



174 WAGES. 

bettered; but "every scheme for their benefit, which does not 
proceed on this as its foundation, is, for all permanent purposes, a 
delusion." "It is impossible," continues Mr. Mill, "that Popula- 
tion should increase at its utmost rate without lowering Wages. 
Nor wdp the fall be stopped at any point short of that which, 
either by its physical or its moral operation, checks the increase 
of Population." 

Here is the great mistake of confounding the undue relative num,- 
her of a class, tvith a general excess of the whole Population. The 
former evil might be corrected by portioning out society anew, 
through the gradual influence of altered laws, so that the divisions, 
or castes, which are too thin in number, might be recruited from 
those which are in excess, and the proper balance be thus restored 
without the necessity of adopting any measures which would affect 
the bulk of the people. The latter evil, if it ever really existed, 
could be removed only by war, pestilence, famine, or a general 
adoption of the doctrine of Malthus. If it were as easy in Eng- 
land as it is in this country for a common laborer to become a 
master-mechanic, or a small tradesman, or to buy a farm ; or if, 
as in most countries on the Continent, the bulk of the laboring 
commiinity possessed either peasant properties, or a kind of pre- 
scriptive right to farm the land of another " on shares," as metayers, 
there would be no need of preaching abstinence from marriage to 
them; they would not compete with each other in the labor- 
market, if the rate of Wages were not high enough to tempt them 
to forsake their independent occupations. The number of persons 
in Great Britain who are entii-ely dependent on the Wages of hired 
labor is unquestionably much too great ; the proportion of this 
class to the whole people is probably five times as large as in any 
country in Continental Europe. Diminish their number, then, by 
all means. But how 1 The Malthusian Economists assume that 
the only mode of effecting this end is to check the natural growth 
of the whole population, — to lessen the yearly average of mar- 
riages and births. But would it not be equally effectual, and more 
practicable, to recruit from them the classes which are strikingly 
deficient in numbers, and thus restore the proper balance of soci- 
ety ? It is certainly an anomaly and an evil, that more than half 
of the people of Great Britain should be hired laborers, who have 
neither capital nor land; but it is equally anomalous and inju- 



WAGES. 175 

rious to the welfare of the whole nation, that only about 50,000 
persons should own nearly all the land, and less than 250,000 
possess four fifths of the whole property, both real and personal. 
If the greater j)art of the hired laborers in England could be con- 
verted into peasant proprietors, we should hear no more complaints 
about the lowness of Wages, or the over-populousness of the coun- 
try. The true mode of raising the rate of Wages is to alter the 
relative number of employers and employed, not to diminish the 
absolute amount of the Population. 

According to the English theory, however, there are certain 
limits below which Wages cannot be reduced. " The cost of pro- 
ducing labor," says McCulloch, "like that of everything else, must 
be paid by the purchasers. The race of laboi-ers would become 
extinct, were they not supplied with the food and other articles 
sufficient, at least, for their support and that of their families. 
This is the lowest limit to which the rate of Wages can be per- 
manently reduced ; and for this reason, it has been called the natu- 
ral or necessary rate of Wages. The market, or actual, rate of 
W^ages may sink to the level of this rate, but it is impossible it 
should continue below it. It is not on the quantity of money 
received by the laboi'er, but on the quantity of food and other arti- 
cles which that money will buy, that his ability to maintain him- 
self, and rear children, must depend. Hence the natural or neces- 
sary rate of Wages is determined by the cost of the food, clothes, 
fuel, etc. required for the use and accommodation of laborers. 
However high the price of these articles, the laborers must always 
receive a supply of them adequate for their suppport; if they did 
not obtain thus much, they would be destitute ; and disease and 
death would continue to thin the population, until the reduced 
numbers bore such a proportion to the national capital as enabled 
them to obtain the means of subsistence." 

The standard of natux-al Wages, however, does not always mean 
the smallest amount of food and other necessaries that is absolute- 
ly requisite to preserve life. As we have seen, what are ac- 
counted necessaries in one country may be esteemed, in another, 
the decencies, and, in a third, the luxuries, of life. In England, 
the custom of the country requires that the laborer should have 
beer ; his family, tea ; and all must have daily provision of bread, 
and occasionally taste meat. Only in Ireland, before the recent 



176 WAGES. 

exodus, was the standard of natural Wages generally reduced to 
the cost of the absolute necessaries of existence, to a few potatoes 
and a little buttermilk, the scantiest provision of the coarsest and 
cheapest food that would support life. In such case, of course, no 
retrenchment is possible ; and whenever a partial failui-e of the 
crops, as in 1847, or any other adverse circumstance, produces the 
slightest enhancement of the price of these necessaries, the laborer 
must starve, if public munificence does not come to his relief But 
in England, if Wages are temporarily reduced, or if food for a short 
time be of higher cost, the working classes can dispense with meat, 
beer, and tea, and still subsist. But the standard of living being 
established by long custom, the laborers will not submit to such a 
reduction of their comforts as a permanent arrangement. 

Hence the importance which is attributed by the Malthusian 
Economists to the preservation of a high standard of living for 
the laboring classes. Those who work for hire, they argue, are 
themselves to blame, if, in their eagerness to burden themselves 
with families, they submit to lower Wages and a poorer style of 
living than that established by their forefathers ; they must blame 
themselves if they do not even take advantage of a temporary in- 
crease in the demand for labor, or a temporary reduction in the 
price of food, to improve their condition permanently, by refusing 
to go back to the low Wages and diminished comforts of their 
former life. 

It is in this way that the Malthusians justify the uniform 
despondency of their views, and refuse to believe that the abolition 
of the corn-laws, emigration, a widely spread epidemic, a destruc- 
tive war, or any other cause of cheapened food or lessening for a 
time the number of competitors for hire, can effect any permanent 
improvement in the condition of the working classes. Instead of 
profiting by the occasion to raise their standard of living, the 
laborers, they say, use the increase of their income only as a means 
of rearing more children, whose competition must eventually 
bring back Wages to their former proportion to the price of food. 
The fact is overlooked, that it is the present hopelessness of their 
condition — the impossibility of rising above their present rank 
in life, or even, as they are already at the bottom of the scale, of 
falling below it — which renders the laboring poor reckless and 
improvident in respect to marriages. Under a different consti- 



WAGES. 177 

tution of society, which should give the bulk of the people a right 
of ownership in the soil, such as the corresponding classes gen- 
erally possess upon the Continent, and should break down the now 
impassable bairiers between the different classes in the commu- 
nity, leaving the avenues to wealth and honor as open as they are 
in the United States, they would either become more provident 
and hopeful, or a large family would no longer be a burden. 

Certainly, no one, under present circumstances, would advise 
either an English or an Irish laboi-er, who is entirely dependent on 
Wages, to diminish his chance of keeping out of the workhouse by 
taking upon himself the support of a wife and children. But the 
very fact, that it is now imprudent for them to marr}', is what 
they have most right to complain of, since it is not their own fault, 
but that of the laws and the aristocratic institutions of their coun- 
tr}'. If the policy of the English law had favored the distribution 
of fortunes as directly as it has actually encouraged their aggrega- 
tion, the laboring classes of England, like the peasantry of France 
and Switzerland, and the inhabitants of our own land, would be 
free to follow their own inclinations without incun-ing the charge 
of imprudence. Their right to do so would be established by a 
fact of the first importance in the ej-es of a Malthusian ; they 
would not have liecome as numerous as they now are. The popu- 
lation of France, under the law which compels an equal division 
of the parent's estate among his children, increases at the rate of 
only five per cent in ten j-ears, while the rate for England is near- 
ly thrice as great. Yet no one supposes that the Englishman is 
naturally more careless and improvident, or more inclined to 
excess, than his neighbor across the Channel. 

In England, an increase of the population is, 2^'>'o tanto, an addi- 
tion to the number of laborers seeking employment, — an increase 
of the supply in the labor-market, — and therefore a cause of the 
depression of Wages. In America it is not so. The facilities for 
collecting a little capital are so numerous, and the expenses of 
living among a rural population, especially in the Western States, 
are so moderate, that the class of persons who are dependent ex- 
clusively upon Wages, and who form the bulk of the conimiuiity 
in many European countries, is here comparatively small. Most 
of our people, at least of those who are native-bom, ma}' be said to 
belong to the class of independent laborers or small capitalists. 

12 



178 WAGES. 

Either by inheritance,' or the assistance of friends, or the facility 
of obtaining credit, or by savings made from Wages earned during 
his minority, almost every native American may be said to have 
the option of " beginning life," as it is called, with a little capital. 
But because this capital is small in amount, the possessor of 
it is willing, if Wages are high, to work for others for a time, 
either as a journeyman, a farm-laborer, a clerk, or in some other 
capacity, in order to increase his little store by additional savings 
from Wages, before he commences business on his own account. 
To be in the receipt of Wages is not in America, as it generally is 
in Europe, to be entirely dependent upon Wages. The person 
employed not imfrequently lends capital to his employer, and is 
thus placed upon an equality with him, and saves his self-respect, 
though he is " working for hire." One who either owns, or has 
the power of purchasing, a small farm, will yet " hire himself out," 
as the phrase is, for a season or two, in order to obtain the means 
of stocking his land, or otherwise facilitating his future enterprise. 
Should Wages be low, however, persons of small means see little 
advantage in postponing their introduction to business, and are 
tempted to employ their own capital at once in some independent 
occupation. There are innumerable openings for private adven- 
ture, which require only an adventurous spirit and a very moder- 
ate amount of capital or credit. The step between the situations 
of a journeyman and a master-mechanic, a clerk and a small 
tradesman, a farm-laborer and a small farmer, is a short one and 
very easily taken. If nothing better can be done, there is always 
the resource of removing to the West, and becoming a pioneer in 
the settlement of government land, which is first obtained with a 
squatter's pre-emption right, and paid for out of the proceeds of 
subsequent harvests, or out of the enhanced value of the land 
when the neighborhood begins to be peojoled. The tide of emigra- 
tion westward always becomes fuller and stronger in periods of 
commercial depression, the stoppage of manufactories, the low 
prices of agricultural products, and the consequent reduction of 
the rates of Wages. A check is thus immediately applied to the 
fall of Wages, which do ]iot sink as low as might be expected from 
the general depreciation of property and diminution of the rate of 
profit. If Wages should be considerably lessened, few operatives 
for hire could be had, excej)t those of foreign origin. Many have 



WAGES. 179 

a home in the rural districts, to which they can retire in such an 
emergency, and wait for a return of the prosperous times which 
first tempted them to leave the paternal roof, and commence work 
for high Wages in a manufacturing town. 

Again, hired laborers easily become small tradesmen or master- 
mechanics, because tlie business of the manufacturer, the mer- 
chant, and the artisan is here not so much concentrated in the 
hands of a few persons with large capitals as it is in England. The 
competition of many, each having but a small stock in tools or 
trade, is not so easily crushed out by the monster undertakings 
of large houses wielding an immense caj)ital, who can outlive the 
reverses of trade, or the jjeriods of depression in the market that 
are \isually fatal to persons of smaller means. Reverses happen 
and failures ensue, oftener even than in England, and to large and 
small capitalists alike ; but, as already mentioned, there are great 
facilities here for bankrupts to recover their position and tr}^ again. 
Profits and losses are great, speculation is rife, and great fortunes 
are acquired and dissipated with marvellous rapidity. Hence 
there is great instability, but also much life and enterprise, in 
trade, and in all departments of industry. 

Here, also, is the explanation of the restless, migratory spirit, 
and the want of local attachments, which have so often attracted 
the attention of foreign observers. Of the population of three of 
our Western States, Minnesota, Iowa, and AVisconsin, amounting 
in the aggregate to 1,622,817, according to the census of 1860, 
only 29 per cent were born within the limits of these States in 
which they are domiciliated, about 27 per cent were born in for- 
eign countries, and over 43 per cent had their nativity in other 
States, though still within the limits of the Union. In European 
countries, the bulk of the population work for hire, and are too 
poor to be able to change their locality ; they lack rather the ability 
than the disposition to emigi-ate. But both in Europe and Amer- 
ica the rule holds, that, in general, only the poorer people — the 
laborers for Wages — are inclined to seek a new home. If, there- 
fore, within twenty years, about 705,000 of our people have mi- 
grated into these three States, it is a proof that the laboring class 
here generally have the pecuniary means for such migration ; in oth- 
er words, they have a small capital, which, if they saw fit, they might 
employ in establishing themselves in business on their own account 



180 WAGES. 

in the places of their nativity, and thus ceasing to work for Wages. 
Taking the whole population of the United States together, accord- 
ing to the same census, it appears that about 5,774,000 native- 
born white Americans, or over 18 per cent of the whole number, 
are now resident in other States than those in which thej had 
their nativity. 

The doctrines of the English Political Economists respecting 
Wages cease to be applicable, or to have even the appearance of 
truth, here in the United States. Our natural standard of Wages 
is, not the smallest sum which will enable the temperate and in- 
dustrious native-born laborer to support a family with decency, 
but the smallest that will enable him to do not only thus much, 
but to amass capital, — that will induce him to forego the inde- 
pendence and the other advantages of trading or working for him- 
self A true regard for the interests of the class to which he 
belongs would lead us to seek rather to lower than to elevate his 
idea of what is necessary for this end. The love of independence, 
the thirst for adventure, the hope of drawing one of those glitter- 
ing prizes that often reward a daring spirit, though accompanied 
with a vast proportion of blanks, tempt far too many to abandon 
the safe course of slowly collecting a moderate property by savings 
from Wages. Many a bankrupt farmer, tradesman, or master- 
mechanic might have safely earned independence by continuing to 
work for hire. 

The mere progress of the population, unparalleled as it has been 
for rapidity, has been far from producing here what the English 
Economists regard as its necessary result, — the depression of 
Wages. During the last few years, indeed, they have been some- 
what depressed through the operation of special causes, which we 
have now to point out and explain. But with this exception the 
real value of Wages, or the quantity of the necessaries of life which 
they will purchase, has probably increased in this country ever 
since the beginning of the present century, when our popvdation 
was only one eighth of what it is now. Neither can the phe- 
nomenon be explained by the recent date of our settlements, nor 
by the extent of fertile, unoccupied land in our Western territory. 
It is only by comparison that the States on our Atlantic border, in 
which this phenomenon of high Wages is exhibited, can be called 
recent settlements. Most of them are already over two hundred 



WAGES. 181 

years old, and have long since passed beyond the stages of colonial 
inftiucy and childhood. Trne, the drain that is caused by the 
constant migration westward tends to explain the effect ; but the 
question remains, why a similar result is not produced even in 
England ; for, as already remarked, the way from Massachusetts to 
Iowa and Kanzas is nearly as long, and quite as expensive, as from 
Dublin and Liverpool to Nova Scotia and Canada. I attribute the 
result, therefoi-e, to moral rather than to physical causes, — to 
American institutions more than to the fact that America is still 
a new country, and is rich in fertile and yet unoccupied land. The 
mobility of society, the wider distribution of property, the absence 
of castes, la carriere ouveiie axix talens, and other peculiarities 
created and fostered by our laws, are alone sufl&cient to account 
for the phenomenon. 

The only causes which strongly tend to a depreciation of Wages 
in this country are the vast and constantly increasing immigration 
of foreigners, the inci'eased burden of taxation, and the want of suffi- 
cient encouragement for our manufactures. These causes may pro- 
duce as lamentable an effect upon Wages in the United States as 
other agencies have caused in Great Britain and Ireland. At pres- 
ent, our institutions are preserved, and general content exists among 
the people, because no class in the community finds itself doomed 
to irretrievable penury, and not one individual is without the well- 
grounded hope of improving his condition, and perhaps of rising 
even to high rank in the social scale. But let the rate of Wages 
here be reduced to what the English Economists regard as their 
natural and necessary standard, — that is, to a bare sufficiency for 
subsistence from day to day, — and the class of laborers, who must 
always form the majority in any community, and who, with lis, 
also have the control in politics, will not be satisfied without 
organic changes in the laws, which will endanger at once our polit- 
ical and social system. 

Our immunity thus far ought not to betray lis into a blind con- 
fidence for the future. A few years have produced a marvellous 
alteration in our prospects, and the change has not been altogeth- 
er for our advantage. The Atlantic has been bridged by steam, 
and the ties which connect ns with Great Britain, and link our 
commercial and social well-being with hers, are strengthening 
every day. Ireland is depopulating itself upon our shores, and the 



182 WAGES, 

influx from Germany and China is rapidly increasing. For the 
four years next after 1849, the average number of foreigners who 
arrived in this country was over 400,000 a year ; for the three 
years before 1846, it was only 121,000. About one million arrived 
during the three years preceding 1870. In one particular, this 
result is inevitable ; we might as well try to dam up the Missis- 
sippi with bulrushes, as to stop this great westward migration of 
the nations. But we may enlarge the field of employment, and 
increase the number of the applications of industry, so that this 
immense influx shall not produce its full eff"ect in dejjressing the 
price of labor. 

The tide of emigration was first turned with overwhelming force 
upon our shores in 1847, a year of famine in Ireland and Scotland, 
and of great distress in several other parts of Europe. The 
census taken by the English government not only shows how great 
was the calamity then endured, but has brought to light another 
fact, which is without a parallel in the history of the world ; — a 
great and fertile country, inhabited by a civilized people, enjoying 
a mild and equitable government, and yet, without the agency of 
war, pestilence, or any sudden paralysis of its industry from ex- 
ternal causes, actually becoming depopulated by famine and emi- 
gration. 

The population of Ireland in 1841 was over eight millions. 
Assuming that the natural rate of increase of the Irish people for 
ten years is twelve per cent, which is the estimate of the Census 
Commissioners for 1841, it follows that the number in 1851, if it 
had not been diminished by the two causes just mentioned, would 
have exceeded nine millions, and, in 1861, would have been about 
ten and one fourth millions. But the actual population of Ireland 
in 1861 was 5,800,000 ; that is, about two and one fourth millions 
less than it was twenty years before, and four and a half millions 
less than what it should have been if the natural law of increase 
had not been checked. " The day is probably not far distant," 
says Prof Fawcett, "when Ireland will require English laborers to 
reap her own harvest." 

What' has become of these millions of human beings'? The 
official returns of the total emigration from the United Kingdom, 
for the twenty years ending in March, 1861, do not account for 
more than three fourths of this number, so that the loss of the 



WAGES. 183 

other fourth must be attributed to famine and the diseases con- 
sequent upon extreme misery and want. And the drain still 
continnes ; a panic seems to have seized the population of Ireland, 
and they rush to the seaports to embark for any other portion of 
the earth, as if the whole island labored under a curse. 

These facts have a peculiar meaning and pertinency for us here 
in the United States ; they must affect our future prosperity, 
whether for good or ill, far more even than that of Great Britain. 
These exiles are coming to us, mostly in a state of gi-eat destitu- 
tion, bringing with them Irish habits, and Irish willingness to live 
in squalor upon the smallest pittance that will support life. 
Already they constitute, either by themselves or in connection 
with the Germans, almost the whole class of our menial or domes- 
tic servants, and of rude laborers in the construction of railroads 
and other public improvements. Cheapness of provisions is not 
the attraction that brings them here ; at this moment, all the 
common articles of provisions are cheaper in Ireland than in the 
Atlantic States of this Union. Nor is it comparative freedom 
from taxation which they seek ; for the annual amount of Irish 
taxes is only about ten shillings a head, which is much less than 
the burden of government here in America. But they come in 
quest of constant employment and higher Wages. These are the 
tangible tokens of our prosperity, the causes of the general w^ell- 
being of our people ; and these have made the United States a 
harbor of refuge for the poor of the civilized world. 

We have proof that the Irish have succeeded in obtaining in 
America what they came to seek, — Wages which should suffice, 
not only to support life, but to enable them to effect considerable 
savings. The remittances which they are making to alleviate the 
misery of their relatives and friends at home, or to enable them to 
emigi-ate to this country, have reached an amount that hardly 
seems credible, though the statistics of the subject, collected by 
the British government, cannot be questioned. It appears that 
the amounts remitted from America to Ireland through the banks, 
exclusive of sums sent by private hands, amounted, in 1848, to 
£460,000; and that they steadily increased, till, in 1853, they 
reached the prodigious sum of £1,439,000. The aggregate of 
such remittances between 1847 and 18G4 was ten millions sterling, 
or about fifty millions of dollars. It is probable that a portion of 



184 WAGES. 

this Slim is remitted for investment, a favorable opportunity being 
afforded for the purchase of land by the sale of Irish " Encum- 
bered Estates." Thus the Irishman comes to America as a 
pauper, and, in a few years, collects the means of returning, if he 
sees fit, to his native country as a landowner. 

The history of Ireland shows the inevitable consequences of free 
trade with a country having so vast an aggregate of capital as 
Great Britain, and also reaping the fruits of the skill and experi- 
ence acquired during a strict enforcement of the protective policy 
for two centuries. The legislative union of the two countries, at 
the beginning of the present centiu-y, broke down the few banners 
which formerly limited their intercourse, and left them to compete 
on what the English Economists consider as equal terms. Till this 
epoch, whatever political evils Ireland may have endvired, her 
social state was not in any marked degree inferior to that of Eng- 
land. The habits of her people, it is true, were not so neat and 
industrious ; but Wages were not reduced to a starvation limit, 
and her cottiers generally had enough to eat and to spare. But 
unrestricted intercourse with England stifled the small beginnings 
of her manufacturing industry ; for her people could purchase 
from the sister country all the products even of the small mechanic 
trades and arts cheaper than they could, at the time, manufac- 
ture them for themselves. They bought in the cheapest market, 
forgetting that they had nothing but the cereal grains, pigs, po- 
tatoes, and butter to offer in exchange, and that the production 
of these articles would not afford employment to half the industry 
of the people. Manufactures could never gain a foothold among 
them, save in the North, where a colony of canny Scotch intro- 
duced the culture of flax, made linen, and have since kept them- 
selves out of the abyss of poverty into which the rest of the 
island has been plunged. So feeble were the means of the native 
Irish for keeping up trade by exportation, that their consumption 
both of domestic and foreign goods dwindled almost to nothing. 
Mr. Martin, a statistical writer upon Irish affairs, cannot suppress 
his astonishment that " the consu«mption of British manufactures 
in Ireland is not more than one guinea per annum for each inhab- 
itant, whereas the negroes in the West Indies consume each five 
pounds' worth annually." But the reason is obvious enough ; the 
negroes in the West Indies have sufficient employment for their 



WAGES. 185 

industry in the production of sugar, coffee, and pimento, in regard 
to which they are not exposed to Transatlantic competition. 
Having enough to sell, they are consequently able and willing to 
buy. But the Irish have nothing to sell except the provisions 
which they take from the mouths of their children. So they have 
gone on, constantly exporting a larger share of their pigs, potatoes, 
and butter, till they have at last ceased to preserve any to satisfy 
their own hunger. "WTiile the famine of 1847 was at its height, 
upwards of three millions of persons were fed at one time by 
public charity. If these are the consequences of free trade with 
England, and exclusive addiction to agricultm-al pm-suits, we may 
well call for the preservation of a protective policy here in the 
United States. 

Though the niunber of Irish who have crossed over into Great 
Britain probably does not equal one fourth of those who have 
found a refuge in the United States, Mr. J. S. Mill, who generally 
opposes the interference of government on any occasion, makes this 
extraordinary admission : " If there were no other escape from 
that fatal immigration of the Irish, which has done and is doing 
so much to degrade the condition of our agricultural and some 
classes of our town popiilation, I should see no injustice, and the 
greatest possible expediency, in checking that destructive inroad 
by prohibitive laws." 

The field for the employment of industry here cannot widen 
fast enough for our wants, except American manufactures, now 
burdened by heavy internal taxes, are protected by a judicious 
tai'iff against foreign competition supported by the cheapness 
Df labor in England, Belgium, and Germany. Already so many 
of the immigrants and the native-born have been driven into 
agricidture as to bring down the prices of breadstufFs and other 
provisions so low that farmers have little encouragement here 
to raise more of them than are necessary for home consump- 
tion. By exporting this cheap food, we are, in fact, assisting the 
foreign manufacturers in their efiForts to maintain that cheapness 
of labor in Europe which now enables them to imdersell American 
producers in our own market. Heavy taxes on raw materials, 
such as lumber and pig-iron, have so enhanced the cost of build- 
ing ships and houses, that most of our commerce is now carried on 
in foreign vessels, and rents even of the poorer class of houses 



186 WAGES. 

have risen so high as to destroy in great part the good effect of 
high Wages. Heavy duties on semi-necessaries, like tea, coffee, 
and sugar, have also so far enhanced the cost of living, that al- 
though nominal Wages, reckoned in money, are still much higher 
than in England, so that our manufactures cannot, without legis- 
lative protection, compete with their British rivals, real Wages, 
reckoned in purchasing power, are reduced, at least for skilled 
labor, nearly to the English standard. High rates of taxation, 
also, on such imported raw materials as hides and coal, wool and 
salt, have so much enhanced the cost of shoes and fuel, of cloth- 
ing, blankets, and carpets, and of packing beef, pork, and fish, that 
the purchasing power of money-wages and salaries has been mate- 
rially diminished. According to the Special Commissioner of the 
Revenue, while the average advance in the price of commodities, 
since 1861, has been about 90 per cent, the corresponding average 
advance in wages has not exceeded 60 per cent. Of course, much 
of this advance is merely nominal, as it is reckoned in a currency 
that is depreciated about 30 per cent. Hence the Wages of the 
laborer must be increased ; but this will so enhance the money- 
cost of the commodities that he produces, that, if very high duties 
do not keep out foreign competition, they cannot retain possession 
even of the home market, all hope of exporting them to advan- 
tage being long since relinquished. 

Hence we are not surprised to be told, in 1869, that "instances 
are not infrequent where skilled workmen from Europe have 
visited the United States, within the last three years, with the 
view of engaging permanently in their special industries, and have 
returned because the inducements offered were not sufficient to 
make a change of residence on their part desirable." The expla- 
nation is, that " although the Wages now paid in the United 
States for skilled labor are nominally much greater than in Eu- 
rope (even when computed on the gold standard), their purchas- 
ing power, as respects commodities and rents, are so much less 
as to leave either no balance whatever in favor of residence in 
this country, or one that is comparatively trifling." Thus the 
average rent of six-roomed tenements in the United States is 
$84 (in gold) per annum; and for four-roomed tenements, $63. 
In the cotton districts, and in Sheffield, England, the correspond- 
ing rents of houses occupied by operatives are $ 43 and $ 35. 



WAGES. 187 

" The aggregate wealth of the country," we are told by the same 
authority, Commissioner Wells, " is increasing, probably as rapidly 
as at any former period ; yet it does not follow that there is the 
same increase in general prosperity. The laborer, especially he 
who has a large family ta support, is not as prosperous as he was in 
1860. His wages have not increased in proportion to the increase 
in the cost of his living. There is, therefore, an inequality in the 
distribution of our annual product, which we must refer to artifi- 
cial causes. This inequality exists even among the working classes 
themselves. The single man or woman, working for his or her 
support alone, receives wages from which savings may be made as 
great as before, and even greater ; especially in the manxifacturing 
towns, where the price of board is, to some extent, regulated ai'ti- 
ficially by the employer. UnmaiTied operatives, therefore, gain ; 
while those who are obliged to support their own families in hired 
tenements lose. Hence deposits in savings' banks increase, while 
marriage is discouraged; and the forced employment of young 
children is made almost a necessity, in order that the family may 
live." 

It is not enough for the peculiar situation in which the people 
of this country are now placed, that the great departments of in- 
dustry should be able merely to sustain themselves, by a gi'eat 
effort, at the point which they had reached ten years ago. They 
must be developed and multiplied at a rate proportioned at least 
to the rapid growth of our population both from native and foreign 
som'ces. Otherwise, the profits of capital and the Wages of labor 
must sink to the level at which they have long rested in Great 
Britain. The inevitable consequence of free trade and constantly 
increasing commercial intercourse between the two countries must 
be to establish among the inhabitants of both the same standard 
of material well-being, the same measure and distribution of 
individual prosperity. We are rapidly becoming as much one 
people as the English and the Irish, or the English and the 
Scotch. To expect that, in two countries thus situated, without 
any special direction of public policy towards maintaining some 
barrier between them, the pressure of population, the profits of 
capital, and the Wages of labor can long remain very unequal, 
would be as idle as to believe that, without the erection of a dam, 
water could be maintained at two different levels in the same 



188 DIFFEKENCES OF WAGES. 

pond. Throw down what remams of our protectire system, and 
let the emigration from Europe and Asia to our shores increase to 
half a million annually, and within the lifetime of the present 
generation the laborer's hire in our Atlantic States wiU be as low 
as it is in England. Our manufactures would flourish then, as 
those of Great Britain flourish now ; cheap labor is the only requi- 
site for placing them upon the same level. It is not, then, for the 
sake of the capital now embarked in our manufacturing enter- 
prises, that we would advocate the continuance of what has been 
well denominated " the American policy." But that the bulk of 
our laboring population should fall into that condition where they 
woidd be exposed to such evils as have visited the laboring classes 
of Great Britain and Ireland during the last twenty years, — that 
the necessary standard of Wages, as the English Economists call it, 
should be here, as well as there, the smallest sum which will give 
a mere subsistence, — this we should regard as the greatest calam- 
ity which the folly of men or the wrath of Heaven could bring 
upon the land. 

The effect of competition upon the rates of Wages in different 
employments has been admirably illustrated by Adam Smith. 
It is matter of common observation, that the workmen in different 
arts and trades are paid very unequally, if their Wages be reck- 
oned only in money. A blacksmith usually earns more than a 
farm-laborer, a watchmaker more than a blacksmith, a lawyer or 
a physician — for these also are laborers for hire — more than a 
watchmaker. How can such inequalities exist, when competition, 
the great equalizing agent, is always at work, and tends always to 
brings Profits, Wages, and Prices to a level % Why do not persons 
leave those employments that are underpaid, and flock into those 
which receive more than the average % The answer is, that labor- 
ers are paid for their services not only in money, but in the vari- 
ous degrees of credit or estimation in which their business is held, 
in the agreeableness or disagreeableness of the occupation, the 
ease or difficulty of learning it, and in its several other peculiari- 
ties; and that competition is often limited by circumstances, so 
that it is unable to produce its full effect. I borrow with some 
enlargement the illustrations of this topic by Adam Smith and 
other Economists. 

First, " the Wages of labor vary with the ease or hardship, the 



DIFFEEENCES OF WAGES. 189 

cleanliness or dirtiness, the honorableness or dishonorableness, of 
the employment." Thus, the work of a stevedore, that of loading 
and unloading vessels at the wharves, as it is more humble, dirty, 
and fatiguing, is more highly paid, than that of a shoemaker. 
" A journeyman blacksmith, though an artificer, seldom earns so 
much in twelve hom-s as a collier, who is only a laborei*, does in 
eight ; his work is not quite so dirty, is less dangerous, and is 
carried on in daylight and aboveground. Honor makes a great 
part of the reward of all honorable pi-ofessions." The profession 
of a teacher is more respectable than that of a dressmaker ; and 
therefore many young women, here in New England, will keep 
school at three dollars a week, when they might earn six dollars 
in the same time by ministering to their countrywomen's love 
of fashion and elegance in dress. Occupations which can be pur- 
sued at home are not so lai-gely remunerated as those which must 
be can-ied on within the precincts of a gi*eat manufactory. A 
farmer's daughter, who has what is called " slop-work " supplied to 
her at home from the cheap-clothing establishments, cannot earn one 
third as much as she would receive for tending a loom in a cotton- 
factory ; but then she can choose her own hours for work or recre- 
ation, can rise early or late, and be free fi-om any external con- 
trol. This freedom of action is paid for by a diminution of wages. 

" Secondly," says Adam Smith, " the Wages of labor vary with 
the easiness and cheapness, or the difficulty and expense, of 
learning the business. When any expensive machine is erected, 
the extraordinary work to be performed by it befoz-e it is worn 
out, it must be expected, will replace the capital laid out on 
it, with at least the ordinary profits. A man educated at the 
expense of much labor and time may be compared to one of 
these expensive machines." Regard must be had to the average 
duration of human life, for at death the whole capital vested in 
the man's education disappears. Hence the excess of the edu- 
cated man's wages over the ordinary wages of common labor ought 
to be the yearly payment of such a life-annuity as could be bought 
with the whole sum vested in his education. 

It should be added, that all persons are not capable of leaniing 
the more difficult employments, for which a quick eye, a dexterous 
hand, and some natural taste or ingenuity are often requisite. 
Not aU common laborers, even after much expense of time and 



190 DIFFERENCES OF "WAGES. 

training, would make good blacksmiths; nor are all blacksmiths 
capable of becoming first-rate machinists. The competition for 
employment in the more difiicult trades is therefore first limited 
by Nature, through the various capacities which she bestows upon 
men ; and secondly, by the necessity of education, which not all, 
even of those who are naturally gifted, have time, money, or op- 
portunity to obtain. Engraving has risen to be one of the fine 
arts, as the talent for practising it with the highest success is as 
rare as that of a great painter or sculptor. In engineering, the 
construction of machinery, and ship-building, great natural ability, 
improved by education and practice, may obtain remuneration so 
liberal as to appear extravagant. 

In what are called the liberal professions, however, though a 
protracted and expensive education is required for admission to 
them, the rates of compensation, on an average, are very low, — 
sometimes actually lower than in the mechanic trades. In Ohio, 
for instance, and, it may be presumed, in most of the other West- 
ern States, the salaries of the clergymen often are not equal to the 
wages of good journeymen blacksmiths. True, some of the clergy- 
men, especially in the Baptist and Methodist denominations, are 
not liberally educated men; but the great majority have com- 
pleted their training both at college and in the professional 
schools. At the bar, also, though a few eminent practitioners 
make great gains, the aggregate earnings of the whole body of 
lawyers, if equally distributed among them, would hardly equal the 
average wages of mechanics. Physicians may be somewhat better 
paid on an average, though the aggregate earnings of their craft 
are capriciously distributed, an ignorant and impudent quack often 
obtaining more than a competent and thoroughly instructed prac- 
titioner. This is because there is no certain criterion of the physi- 
cian's skill ; whether the patient lives or dies, it is generally doubt- 
ful -whether the result is to be attributed to nature or the doctor. 

Adam Smith justly attributes the inadequate compensation of 
labor in the liberal professions, first, to the superior dignity or 
honorableness of such labor, which is an ofiset for the inferior 
pecuniary reward ; secondly, to the natural confidence which every 
man has in his own abilities and his own good fortune, whereby he 
persuades himself that he shall draw one of the few great prizes in 
the law or the church, instead of one out of the many blanks ; and 



DIFFERENCES OF WAGES. 191 

thirdly, so far as literature and the sacred ministry are concerned, 
to the number of persons who are educated for those occupations 
at the public expense. " It has been considered as of so much 
importance that a proper number of young people should be edu- 
cated for certain professions, that sometimes the public and 
sometimes the piety of private founders have established many 
pensions, scholarships, exhibitions, bursaries, etc. for this purpose, 
which draw many more people into those trades than could other- 
wise pretend to follow them. In aU Christian countries, I believe, 
the education of the gi-eater part of chm-chmen is paid for in this 
manner. Veiy few of them are educated altogether at their own 
expense. The long, tedious, and expensive education, therefore, 
of those who are, wiU not always procure them a suitable reward, 
the church being crowded with people who, in order to get em- 
ployment, are willing to accept of a much smaller recompense than 
what such an education would otherwise have entitled them to ; 
and in this manner the competition of the poor takes away the 
reward of the rich." 

In respect to the education, in part gratuitous, which is offered 
by the colleges as a general preparation for the other professions, 
though the effect is certainly to lessen the emoluments of prac- 
titioners by increasing the nimiber of competitors, sound policy, or 
a regard for the best interests of the people, requires that it should 
be continued. Adam Smith, with his usual bias towards the 
principles of free trade, would have the whole matter regulated by 
the natural operation of supply and demand, assuming that, if 
more lawyers, physicians, and literary or scientific men are needed, 
their rates of compensation would be raised, and thus more 
persons would be tempted to enter these professions, even at the 
cost of educating themselves. But the immediate earnings of 
literary and scientific men, as already explained, are inferior to 
their merits, and altogether insufficient for their wants ; while it 
is of the utmost importance for the interests of the public that a 
numerous class of highly educated men should exist in the com- 
munity, capable of appreciating each other's efforts and of aiding 
the progress of letters, science, and invention. Besides, many 
must receive the benefits of a liberal culture, in order that the few 
who are able to profit by it in the highest degree may be sure not 
to miss the requisite preparatory training, without which even 



192 DIFFERENCES OF WAGES. 

their eminent abilities may not produce their proper fruits. 
Many thousands must gradiiate at Oxford and Cambridge, in order 
that a possible Milton, Newton, or Bentley may not be hindered 
from benefiting the world by his genius. It is a commonplace 
remark, that " mute, inglorious Miltons " probably rest in every 
village churchyard. That is a short-sighted policy which would 
weigh the cost of institutions of learning against only the average 
result upon all those who are trained at them ; the value, to the 
community at large, of the services of such men as have been 
named, is literally inestimable ; it would outweigh the expense of 
founding and maintaining universities enough to educate the 
whole people. 

Thirdly, says Adam Smith, " the Wages of labor in different 
occupations vary with the constancy or inconstancy of employ- 
ment. In the greater part of manufactures, a journeyman may 
be pretty sure of employment almost every day in the year that 
he is willing to work. A mason or bricklayer, on the contrary, 
can work neither in hard frost nor in foul weather, and his em- 
ployment at all other times depends upon the occasional calls of 
his customers. He is liable, in consqeuence, to be frequently 
without any. What he earns, therefore, while he is employed, 
must not only maintain him while he is idle, but make him some 
compensation for those anxious and desponding moments which 
the thought of so precarious a situation must sometimes occasion." 
It is easy to see that the person who can be employed only a part 
of the time ought to receive higher Wages than one who has 
regular work and constant pay ; and, for evident reasons, his com- 
pensation must be larger. On account of the irregularity and 
uncertainty of his occupation, fewer persons will be disposed to 
engage in it ; thus the competition will be less, and he will be 
a,ble to raise his price, until the increased pay affords an adequate 
compensation for the inconstancy of the employment. 

In most cases, employers take all the risk ; that is, they insure 
regular Wages to their hands, whether the work be constant or 
irregular, lucrative or insufficient to pay the expenses. Thus, the 
driver of a stage-coach receives the same pay, whether the vehicle 
be full or empty ; and the clerk in a store must have his regular 
salary, though business is sometimes dull, and he has little to do. 
So, also, a ship must be manned by sailors enough to take care of 



DIFFERENCES OF WAGES. 193 

her even in a storm; and the consequence is, that in ordinary, 
pleasant weather, the crew may be idle more than half of the time. 
Sometimes, however, the person employed takes the risk, and his 
Wages, when he is at work, must be high enough to compensate him 
for occasional necessary idleness. Thus, the driver of a hackney- 
coach is paid only a certain pi'oportion of what he can earn during 
the day ; and the crews of our American whaling-vessels generally 
" go upon shares," as it is termed ; that is, they have no monthly 
Wages, but receive the value of a fixed portion of the oil that they 
take. As ships sometimes come home " clean," or without any oil, 
so that they obtain nothing for one or two years' labor, their share 
of a full cargo ought to exceed, and actually does considerably 
exceed, the ordinary amount of seamen's Wages for a voyage of 
the same length. 

The fourth cause assigned by Adam Smith for variation in the 
rate of Wages is the small or great trust that must be reposed in 
the person employed. Thus, goldsmiths and jewellers are paid 
more liberally than workers in brass or iron, not merely on account 
of theu- gi'eater skill, and in spite of their labor being more agree- 
able and less fatiguing, but because of the greater value of the 
materials with which they are intrusted. " We trust our health 
to the physician, our fortune, and sometimes om* life and reputation, 
to the lawyer and attorney. Such confidence coidd not safely be 
reposed in people of a very mean or low condition. Their reward 
must be such, therefore, as may give them that rank in the society 
which so important a trust requires. The long time and the great 
expense which must be laid out in their education, when combined 
with this ch-cumstance, necessarily enhance still fui'ther the price 
of their labor." 

On the same principle, also, those who are intrusted with the 
handling of much money, such as the cashiei-s and tellers of banks, 
the treasurers and managers of manufacturing and railroad corpo- 
rations, must receive high salaries. It may be thought, perhaps, 
that there is some degi-adation in being rewarded for common 
honesty, as men ought to be honest without being paid for it. 
So they ought ; but what they are paid for is, not honesty, but 
the reputation for honesty, — that secm-ity which is found in their 
weU-known previous lives and character, and in the general cir- 
cumstances of their situation, that they will be faithful to their 
13 



194 DIFFERENCES OF WAGES. 

trust. Not all, not even many, persons are lucky enough to be 
well known to the community at large as deserving full confidence 
in any office, however much exposed to temptation. The compe- 
tition for such offices being thus restricted to a, few, they are 
enabled to raise the price of their services. Sometimes security is 
taken, the persons employed being required to give bonds to a 
heavy amount for their fidelity to their engagements. In this 
case, there is no need of their integTity being well known to the 
public at large ; it is enough that they have so far earned the con- 
fidence of a few as to be able to obtain sufficient bondsmen. The 
contrivance of giving bonds thus opens the competition, and tends 
to reduce salaries, but not to make them so low as they would be 
if no bonds were required. 

Fifthly, says Adam Smith, " the Wages of labor in difi"erent 
employments vary according to the probability or improbability of 
success in them. In the greater part of the mechanic trades suc- 
cess is almost certain, but very uncertain in the liberal professions. 
Put your son apprentice to a shoemaker, and there is little doubt 
of his learning to make a pair of shoes ; but send him to study the 
law, and it is at least twenty to one if he ever makes such profi- 
ciency as will enable him to live by the business. In a perfectly 
fair lottery, those who draw the prizes ought to gain all that is 
lost by those who draw the blanks. In a profession where twenty 
fail for one that succeeds, that one ought to gain all that should 
have been gained by the unsuccessful twenty. The counsellor-at- 
law, who, perhaps at forty years of age, begins to make something 
by his profession, ought to receive the retribution, not only of his 
own so tedious and expensive education, but of that of more than 
twenty others who are never likely to make anything by it. How 
extravagant soever the fees of counsellors-at-law may sometimes 
appear, their real retribution is never equal to this." 

The average gains of practitioners at the bar are reduced by the 
great number of those who enter the profession without depending 
upon it for support, as. they have independent means of livelihood, 
and desire only a genteel excuse for doing nothing. Some, also, 
have recourse to the law, because it is not only a highly reputable 
business, but is an easy mode of making the transition to political 
life. Many thus appear to be waiting for clients, who are really 
on the lookout only for a chance of being elected to the legisla- 



DIFFERENCES OF WAGES. 195 

tiire or to Congress, Though these two classes of persons do not 
enter actively into the competition, for fees, their presence dimin- 
ishes the chances of success for those who hope to rise in the pro- 
fession ; some business occasionally falls into their hands, and they 
increase the crowd in the midst of which merit and ability often 
remain hidden from the world. Hence, as Adam Smith remarks, 
while the ordinary income of shoemakers and blacksmiths exceeds 
their ordinary expenditure, it will be found that the annual gains 
of the lawyers, as a body, bear but a small proportion to their an- 
nual expenses. 

I do not mean that success is more doubtful at the bar than in 
any other business. In this countiy, undoubtedly, trade is equally 
uncertain ; for it is said that three fourths of those who engage in 
it become insolvent in the course of the first five years ; and of 
those who escape the gulf of bankruptcy, not one in ten succeeds 
in amassing a fortune. But " uncertainty of success," as Mr. 
Senior remarks, "■ cannot well affect the Wages of common labor, 
since no man, unless he be to a certain extent a capitalist, unless 
he have a fund for his intermediate support, can devote himself to 
an employment in which the siiccess is uncertain." He remarks, 
moreover, "that there are two sorts of uncertainty. In some 
cases, the hazard is essentially connected with the employment 
itself, and recurs, in about an equal degree, at every operation. 
Smiiggling and the manufacture of gunpowder are instances. 
Experience and skill may somewhat diminish the risk : but the 
best smuggler and the best maker of gunpowder probably each 
suffers in average amount of loss. But there are employments in 
which success, if once attained, is permanent. Such is often the 
case in mining. That mining is generally the road to ruin is 
notorious in all mining countries ; but there are miners who have 
never suffered a loss. The same may be said of the liberal pro- 
fessions. Granting them to be as uncertain as Adam Smith be- 
lieved them to be, the evil to which that uncertainty refers is 
experienced only by those who fad. To those who succeed, they 
afford a revenue eminently safe and regulai*. Their uncertainty 
is personal. It arises from the error to which every man is sub- 
ject when he compares his own qualifications with those of his 
rivals. If he be found on the actual trial inferior, his failure is 
irretrievable ; in the other alternative, his success is as permanent." 



196 DIFFEEENCES OF WAGES, 

The inequalities thus far considered proceed from causes that 
are inherent in the employments themselves. But there are 
others which arise from the peculiar laws and customs of different 
nations, and which operate by obstructing the competition that 
would otherwise reduce Wages and Profits to a level. If other 
things are equal, and if persons are left to their own choice, they 
will flock into the occupations that are more lucrative, and will 
desert those which are less productive, until the increased supply 
of labor and capital in the former and the diminished supply in 
the latter bring about equality between the two classes. But 
people are not always left to themselves ; hindrances often exist, 
sometimes created by the laws, sometimes only by the habits and 
feelings of the people, which obstruct the free movement of labor 
and capital from one occupation to another. 

The most remarkable of the hindrances existing by force of law 
are the exclusive privileges that were "granted to the corporations, 
or guilds of trade, which formerly existed in almost every city in 
Europe, but which are now rapidly dying out. AU the persons 
practising any one art or trade in a particular city — such as the 
tailors, the brewers, the tanners, the goldsmiths, etc. — were united 
into a company, which received from the government by charter 
the exclusive right to practise their vocation. The competition in 
this art or trade was thus restricted to those who had been made 
free of the company; and no person could become free of the 
trade till he had served an apprenticeship to it, usually for seven 
years, and had complied with other regulations, which were often 
intentionally made numerous and vexatious, in order to prevent 
too many persons from entering the business and diminishing its 
profits. Thus, the number of apprentices which each master 
might have was often determined by law, and sometimes a heavy 
fee or fine was exacted before the apprentice who had completed 
his term could become free of the craft. " In their greatest pros- 
perity, these fraternities, more especially in the metropolis, became 
important bodies, in which the whole community was enrolled; 
each had its distinct common hall, made by-laws for the regu- 
lation of its particular trade, and had its common property." 
Membership became the principal avenue of admission to the 
general franchise of the municipality ; and as the impediments to 
becoming freemen were multiplied, the management of civic affairs 



DIFFERENCES OF WAGES. 197 

gradually fell into the hands of a little oligarchy. Sometimes the 
royal charters expressly vested the local government, and even the 
immediate election of members of Parliament, in small councils, 
originally nominated by the Crown, and ever after self-elected.* 

"All such incorporations," says Adam Smith, "were anciently 
called Univei'sities, which indeed is the proper Latin name for any 
incorporation whatever. The University of Smiths, the University 
of Tailors, etc., ai'e expressions which we commonly meet with in 
the old charters of ancient towns. When those particular incor- 
porations which are now peculiarly called Universities were first 
established, the term of years which it was necessary to study in 
order to obtain the degree of Master of Arts appears evidently to 
have been copied from the term of apprenticeship in common 
trades, of which the incorporations were much more ancient. As 
to have wrought seven years under a master properly qualified was 
necessary in oi'der to entitle any person to become a master, and 
to have himself apprentices in a common trade, so to have studied 
seven years under a master properly qualified was necessary to 
become a Master, Teacher, or Doctor (words anciently synon- 
ymous) in the liberal arts, and to have scholars or apprentices 
(words likewise originally synonymous) to study under him." 

The ostensible purpose of the incorporated trades was, like that 
of our modern inspection laws, to insure the good or merchantable 
quality of the commodities offered for sale ; this end it was pro- 
posed to effect by oi'daining that the articles should be manufac- 
tured only by practised and skilful workmen, who had served a 
full apprenticeship to the craft. But, as Adam Smith remarks, 
" the institution of long apprenticeships can give no seciu-ity that 
insufficient workmanship shall not frequently be exposed to public 
sale. When this is done, it is usually the eflect of fraud, and not 
of inability ; and the longest apprenticeship can give no security 
against fraud." The inspection-mark upon a ban-el of flom*, or 
salted meat, or pickled fish, or the name of the manufacturer 

* These incorporated trades must not be confounded with what are commonly 
called corporations, instituted for manufacturing, banking, turnpike, or railroad pur- 
poses, here in America; though the similarity of name and origin has directed much 
unfounded political odium against the latter. The old guilds of trade were proper 
numopolies, no other persons being permitted to exercise the craft which was their 
special vocation. But our modern corporations have no exclusive privileges; any 
individual, or another incorporated company, may begin competition with them in 
the same town or village. 



198 DIFFEEENCES OF WAGES. 

printed upon a bale of cloth, is a much better guaranty of the 
quality of the article. Besides, long apprenticeships are not 
needed, as the mystery of any handicraft can be learned in less 
than a year, so that the operative can work, not as speedily indeed, 
but as well — that is, he can turn out as perfect an article — as 
any veteran in the business. At any rate, he will be the quickest 
to learn, who has the prospect of being fully paid just as soon as 
he can complete the article in a workmanlike manner, and who is 
furthermore required to pay for the tools and materials that he 
spoils. The real purpose of the guild was to maintain a monopoly 
of the trade, under the cover of which purchasers were obliged to 
take what they offered for sale at such prices as they chose to 
affix, or to do without the commodity altogether. Individual 
members of the company, it is true, might compete with each 
other; but their competition was always subject to the by-laws 
enacted by the council of the guild. 

Old expedients come up for renewed trial, after the lapse of 
centuries, with only a change of name. The modern Trade- 
Unions, strikes, and associations of operatives, are but the ancient 
guilds revived, their avowed object being to raise Wages and 
prices by diminishing the number of competitors. Even here in 
America, where the utmost freedom of competition has been the 
life of trade, and there are fewer restrictions upon industry, either 
legal or consuetudinary, than in any country upon earth, at a 
certain strike of the journeyman printers, the Union required that 
only a fixed number of apprentices should be employed in each 
office, in proportion to the number of journeymen in it ; and that 
women or girls should not be employed to set types, though it is 
an occupation in which they are nearly as well fitted to excel as in 
the use of the needle. Mr. Laing seriously argues in favor of such 
measures, on the ground that " labor itself is a property, entitled 
to legal protection as much as land, or goods, or any kind of prop- 
erty that labor produces " ; and that " the supply of the public 
with all the articles of handicraft, or labor of skill, [should be] 
confined to those who had acquired a property in that labor." 

Here appears to be a confusion of thought ; labor is rightly 
considered as property, and is most effectually protected as such, 
when it can be applied to any purpose, or in any occupation, 
which the laborer prefers. To create any impediment to the 



DIFFERENCES OF WAGES. 199 

transition of labor from one employment to another is not to 
protect, but to violate, the essential rights of industry. To give 
to any individual, or any association, the monopoly of any article 
or any employment, is to create in the favored class a right of 
property in other men^s labor, — that is, a right to prevent all 
other persons from selecting their own occupations, and making 
the best use that they can of their physical and mental j^owers. 
It is also to tax the whole community for the benefit of the 
favored class, by compelling the former to pay such a price for 
the commodity, or such Wages for the labor, as the latter may 
require. Prices are equitably adjusted, when the seller says to 
the purchaser, " Pay me what I ask, or manufacture the ai-ticle 
for yoiurself " The ancient incorporated companies and the mod- 
ern Trade-Uuions say, " Pay me what I ask, or do without the 
article altogether ; you shall not have the option of manufacturing 
the article for yourself" How does Mr. Laing suppose that the 
operatives in any craft, whether they have served a long appren- 
ticeship to it or not, can have " acquired a property in that 
labor " 1 Unquestionably they are entitled to prosecute it them- 
selves ; but they have no right, either natural or acquired, to keep 
other persons out of the same employment. 

Adam Smith takes a more correct view of the subject when he 
says : " The property which every man has in his own labor, as it 
is the original foundation of all other property, so it is the most 
sacred and inviolable. The patrimony of a poor man lies in the 
strength and dexterity of his hands; and to hinder him from 
employing this strength and dexterity in what manner he thinks 
proper, without injury to his neighbor, is a plain violation of this 
most sacred property. It is a manifest encroachment upon the 
just liberty both of the workman and of those who might be 
disposed to employ him. As it hinders the one from working at 
what he thinks proper, so it hinders the others from employing 
whom they think proper. To judge whether he is fit to be em- 
ployed, may surely be trusted to the discretion of the employers 
whose interest it so much concerns." 

These principles, however, are not of universal application ; an 
exception should be made in the case of the restraints that are 
imposed by the la.ws of most countries upon admission into the 
learned professions. Usually, the purchaser is the best judge of 



200 DIFFERENCES OF WAGES. 

the quality of the goods that he buys, and the character of the 
person that he deals with ; a regard for his own interest will 
protect him against fraud more effectually than any regulations 
which the government can devise. But it is not so when he buys 
the services of a physician. Health or sickness, life or death, then 
depends upon the competent information and skill of the person 
employed by him ; and of these qualities he is a very poor judge, 
as sickness may have been a rare occvu-rence in his family. But 
the consequences of an error may be fatal, and the event indicates 
but very imperfectly the beneficial or injurious consequences of 
the medical treatment pursued. A plausible charlatan may easily 
impose upon the credulity of the public, and many valuable lives 
may be lost before his ignorance and presumption can be fully 
exposed. Most governments attempt to protect the community 
against such injury by multiplying restrictions upon irregular 
practitioners, and extending the fuU privileges of the profession 
only to those who have completed a prescribed course of edu- 
cation, and have obtained a diploma, or certificate of competency, 
from a board of duly qualified examiners. 

I have already intimated that competition for employment is 
sometimes restricted, not only by law, but by the customs of the 
country, or by the habits and feelings of the people. In the 
United States, mobility of fortune, station, and employment is the 
most striking feature of society ; no impediment is created by law 
or fashion to the most frequent and sudden changes of position 
and business. Thus an equalizing process is constantly going on 
with respect both to Wages and Profits; no one profession or 
employment can enjoy even a momentary advantage without 
sharing it among a crowd of competitors. In England, it is far 
otherwise; a weU-established and clearly defined gradation of 
ranks has existed so long, and has so moulded the habits and 
expectations of the people, that comparatively few think of step- 
ping out of the station or the business to which they were bom. 
The larger emoluments and superior advantages of a different 
position hardly attract their notice, and certainly excite no emu- 
lation or regret. 

In England, and, to a smaU extent, in some of the States of 
this country, an obstacle to the free circulation of labor is created 
by the poor-laws. A town or parish is bound to support those 



DIFFERENCES OF WAGES. 201 

paupers only who were born in it, or who, in vaiious ways speci- 
fied by the laws, have obtained a " settlement " within its limits. 
Sometimes, forty days' undisturbed residence were made sufficient 
for obtaining a settlement ; more stringent regulations required 
that the person should have been assessed to parish rates and 
paid them, or should have served an apprenticeship there, or have 
been hired into service there and remained in such service for a 
full year. Those who have not complied with these requisites 
may be warned off, or sent home to the parish where they belong. 
Through such regulations, it is evident that there may be a super- 
fluity of labor in one place, and considerable deficiency of it in 
another, and that industry may be very unequally compensated 
in different districts. Frequent litigation arises under the law of 
settlement, as the facts in each case are often imperfectly known 
or difficult to be proved ; and cases of extreme hardship sometimes 
happen, as when a family reduced by poverty and sickness are 
forcibly removed to a distance fz-om the place which they have 
chosen for their home, or are sent travelling over the whole counr 
try in search of the parish to which they rightfully belong. But, 
as ah'eady intimated, the evil is not one of much moment here 
in America, where the Wages of labor are high, and where there 
is but little pauperism among the native-born, and that little 
can be supported at insignificant expense. No great pains, there- 
fore, are taken to prevent a person from obtaining a settlement 
wherever he likes. 

Mr, Senior justly remarks, that " the difficulty with which labor 
is transferred fi'om one occupation to another is the principal 
evil of a high state of civilization. It exists in proportion to the 
Division of Labor, In a savage state, almost every man is equally 
fit to exercise, and in fact does exercise, almost every employment. 
But in the progress of improvement, two circumstances combine 
to render narrower and nan'ower the field within which a given 
individual can be profitably employed. In the first place, the 
operations in which he is engaged become fewer and fewer ; in 
a large manufactory, the man who is engaged in one of these 
operations has little experience in any of the others. And in the 
second place, the skill which the Division of Labor gives to each 
distinct class of artificers generally prevents whatever peculiar 
dexterity an individual may have from being of any value in a 



202 DIFFERENCES OF WAGES. 

business to which he has not been brought up. A workman 
whose specific labor has ceased to be in demand finds every other 
long-established employment filled by persons whose time has 
been devoted to it from the age at which their organs were still 
pliable and their attention fresh." 

This subject is excellently illustrated by Mr. Laiiig, with refer- 
ence to the qualifications of emigrants to perform the novel tasks 
imposed upon them by their change of residence. " Two hundred 
years ago," he says, " when the peopling of the old American 
colonies was going on, the great mass of the population of the 
mother country was essentially agricultural ; but every working 
man could turn his hand to various kinds of work, as well as to 
the plough. He was partly a smith, carpenter, wheelwright, stone- 
mason, shoemaker. The useful arts were not, as now, entirely in 
the hands of artisans bred to no other labor but their own trade 
or art ; very expert, skilful, and cheap producers in that, but not 
used to, or acquainted with, any other kind of work. This infe- 
rior stage of civilization, in which men were not co-operative to the 
same extent as now, but every man did a little at everything, and 
made a shift with his own unaided workmanship and production, 
was a condition of society very favorable to emigi-atiou-enterprise 
and to colonization. It continues still in the United States, and 
is the main reason why their settlers in the backwoods are more 
handy, shift better for themselves, and thrive better, than the 
man from this country, who has been all his life engaged in one 
branch of industry, and in that has had the co-operation of many- 
trades preparing his tools and the materials for his work. 

"Another advantage for emigration in that state of society 
which we in Great Britain have entirely outgrown, was, that the 
female half of the population contributed almost as much as the 
male half to the subsistence of a family, especially an emigrant 
family. In the days of King James, and of Charles I. and 
Charles II., and down even to the end of the last century, the 
emigrant could reckon upon the household work of the females 
of his family as more or less profitable, and at least saving, by 
the production of all clothing material. In genteel families at 
home, all the family linen and cloth for common wear, and often 
some for sale in the country towns, was produced by household 
work. The progress of society to a higher state of material refine- 



DIFFERENCES OF WAGES. 203 

ment has entirely superseded such family production. Co-opera- 
tive labor in factories supplies the public with much better and 
finer goods ; and the public taste is so much refined by the contin- 
ual enjoyment of finer articles, that the old mode and quality of 
production would not satisfy it now ; but that former- state was 
more favorable to emigration than our present more advanced 
social condition. There seems to be a stage in the progi'ess of 
nations at which they can throw off swarms with most success. 
A nation, like an individual, may become too refined for coloniz- 
ing ; its social state too co-operative ; men too dependent on other 
men for the gratification of acquired tastes and habits, which 
have become part of their natm-e, and interwoven with the daily 
life even of the poorer classes." 

The case of household or home manufactures, here alluded to 
by Mr. Laing, is an interesting one, as it shows that, under 
certain circumstances, persons may be willing to work, and may 
find it pi'ofitable to work, for much less than the ordinary compen- 
sation of labor in their neighborhood. An agricultural family has 
considerable leisure time in the course of the year, the winter 
being a period of almost entire suspension of their customaiy 
tasks. This leisure they may profitably devote to any species of 
manufactiu'e which can be pursued at home, at intervals, and 
without the aid of costly tools ; for however poorly such labor 
may be compensated, its proceeds are all clear gain. The time 
would be entirely lost, if it were not thus employed. Thus, spin- 
ning and knitting may continue to be canned on by hand in 
many a humble family, long after the most perfect machinery 
for performing these processes has been invented, and the prices 
of the articles spun or knit have consequently been reduced to a 
very low rate. The family would not be enabled to subsist by 
devoting themselves entirely to these employments ; but their 
subsistence being already secured by agriculture or some other 
adequately compensated labor, their leism-e may be economized by 
such supplementary tasks, and a small addition be thus obtained 
to their slender income. The Swiss, a frugal and industrious peo- 
ple, are noted for having carried these home manufactures, espe- 
cially of watches and toys, to a gi'eat extent, and for maintaining 
them against the formidable competition of British fuel, capital, 
and machinery. 



204 PEOFITS, 

A similar qase is presented in the Wages of female labor, which 
are usually much lower than those of males. The reason is, that 
comparatively few women are solely dependent upon what they 
can earn for themselves; most of them have a husband, father, 
or brother by whom they are supported. Being fed from other 
sources, they can afford to perform at a very low price the few 
tasks that are deemed appropriate for their sex. So many of 
them are willing to work upon these terms, in order to obtain, not 
a livelihood, but the means of copying a new fashion, or of pur- 
chasing a coveted article of furniture or a bit of finery, that 
Wages in their whole department of industry are permanently 
depreciated ; and the few women who are xmfortunate enough to 
be thrown wholly upon the fruits of their own industry for sub- 
sistence are reduced to great straits. Thus, sewing is a peculiarly 
feminine occupation, and is therefore more inadequately paid than 
any other species of manual labor. Hood attracted the attention 
and sympathy of all England for the hard fate of the needle- 
women of London ; and novelists have woven many pathetic fic- 
tions out of the sorrows of governesses. The menial services of 
females are better paid, in America at least, than any other 
species of woman's industry ; a good cook sometimes earns more 
than an accomplished teacher, and certainly finds it easier to 
obtain employment. The meanness, or, as most women consider 
it, the degrading character, of the employment, must be compen- 
sated by high money- Wages, 



CHAPTEE XI. 

CAUSES WHICH AFFECT THE RATE OF PROFITS : LIMITED EXTENT OP 
THE FIELD FOR THE USE OF CAPITAL : THE THEORY OF GLUTS. 

Capital being amassed, as we have seen, by frugality or absti- 
nence, Profits are the reward of abstinence, just as Wages are the 
remuneration of labor, and Rent is the compensation for the use 
of land. Labor, capital, and land are the three instruments of 
production; and therefore the exchangeable value of everything 
produced is resolvable into three component parts, — Wages, 



PROFITS. 205 

Profits, and Rent. To adopt Adam Smith's language, " In every 
society, the price of every commodity finally resolves itself into 
some one or other, or all, of these three parts ; and in every m- 
proved society, all the three enter, more or less, as component parts, 
into the price of the far greater part of commodities." In the 
origin of society, fertile land being abundant or equally distrib- 
uted, so that there is no monopoly, Rent does not exist, and the 
whole value of the thing is resolvable into Profits and Wages. 

But under ordinary circumstances, or in every stage of society 
above the lowest degree of barbarism, aU three of these elements 
concur to make up the value of every article produced. " In the 
price of corn, for example," says Adam Smith, " one part pays the 
Rent of the landlord, another pays the Wages or maintenance of 
the laborers employed in producing it, and the third pays the 
Profit of the farmer. These three parts seem, either immediately 
or ultimately, to make vip the whole price of corn. A fourth part, 
it may perhaps be thought, is necessary for replacing the stock of 
the farmer, or for compensating the wear and tear of his laboring 
cattle and other instruments of husbandry. But it must be con- 
sidered that the price of any instrument of husbandry, such as a 
laboring horse, is itself made up of the same three parts, — the 
Rent of the land upon which he is reared, the labor of tending 
and rearing him, and the Profits of the farmer who advances both 
the Rent of this land and the Wages of this labor." 

Capital may be largely productive of wealth, though the Profits, 
or share of the value created which comes to the capitalist, may 
be relatively small ; for the larger portion of the value produced 
may be absorbed in the payment of Rent and Wages. "As any 
particular commodity comes to be more manufactured, that part 
of the price which resolves itself into Wages and Profits comes to 
be greater in proportion to that which resolves itself into Rent. 
In the progress of the manufacture, not only the number of Profits 
increase, but every subsequent Profit is greater than the foregoing ; 
because the capital from which it is derived must always be 
greater. The capital which employs the weavers, for example, 
must be greater than that which employs the spinners, because it 
not only replaces that capital with its Pi-ofits, but pays, besides, 
the Wages of the weavers ; and the Profits must always bear some 
proportion to the capital." 



206 PROFITS. 

Still it is true, in the last analysis, as already stated, that the 
creation of all value may be traced to labor alone. Capital itself 
is created by labor, and may be called consolidated or invested labor. 
It consists of the economized or reserved fruits of previoiis labor; 
so that Profits are only the compensation of former industry, just 
as Wages are the compensation of present industry. What is 
usually called Rent, also is, in great part, only the compensation 
of the labor and capital that have previously been expended upon 
the land, and so closely incorporated with it that the original and 
the acquired properties of the soil can no longer be distinguished 
from each other. The greater part of what is popularly termed 
Rent, then, is nothing but Profit, or, in other words, the Wages 
of past industry. Ground-Rent in cities and towns, being paid for 
the mere space or room on which buildings may be erected, is 
perhaps the only instance of Rent properly so called. According 
to Ricardo, Rent is the compensation for the original and inherent 
properties of the soil ; then it is not, strictly speaking, the reward 
of an agent that has concurred in the production, but is only a 
share, appropriated on the monopoly/ principle, of the previously 
existing value. These original properties of the soil are the free 
gift of Nature ; like the air and the light, they cost nothing to 
anybody. But as they are not inexhaustible in amount, — at 
least in localities where they are most needed, — they are appro- 
priated by individuals, and, through the monopoly thus created, a 
tax is levied upon the producers of value. 

But when Profit is spoken of as the third component part of 
value, there is an ambiguity in the meaning of the word which de- 
serves attention, as it is the source of several of Mr. Ricardo's para- 
doxes. In the ultimate distribution of the price or value, the 
whole share which falls to the capitalist is called Profit by Ricar- 
do ; but this includes the replacement of the capital which he oriffi- 
nally vested in the undertaking, as well as that enlargement of this 
capital in the process of production which alone is usually denomi- 
nated Profit. What this Economist calls Wages, also, is only the 
ehare or proportion of the finished product which is received by 
the laborer ; as what he terms Profit is the share or proportion of 
the same product which accrues to the capitalist. Thus, Rent 
being a fixed sum, to be first deducted from the total value, with- 
out any reference to the comparative amount of Wages and Prof- 



PROFITS. 207 

its, what remains after this deduction is to be divided between the 
laborer and the capitalist. According to Ricardo, indeed, Rent, 
is not an element in the Cost of Production, — does not enter into 
Value at all ; for the poorest land in cultivation yields no Rent, 
and the Value is regulated by the Cost of Production on this 
poorest land. Hence ^Vlr. Ricardo was led to affii'm, that " noth- 
ing can affect Profits but a rise of Wages " ; that " whatever raises 
the Wages of labor lowers the Profit of stock " ; and that, " as the 
Wages of labor fall, the Profits of stock rise." Summing up the 
whole doctrine in one theorem, he maintains that high Wages and 
high Profits are incompatible, since whatever is added to the one 
must be taken from the other. He proposes to divide the whole 
value produced into two parts, giving the name of Wages to the 
one, and of Profits to the other ; and if his nomenclature is correct, 
the truth of his doctrine is self-evident. When a given quantity 
is to be divided into only two parts, it is manifest that either one 
of these parts can be enlarged only at the expense of the other ; 
they must vary in the inverse ratio of each other. 

But few words are needed to expose this paradox. When words 
are taken in their ordinary acceptation, it is certain that high 
Wages and high Profits often go together, and tend to produce 
each other. The rates of both are considerably higher in the 
United States than in Great Britain ; both are much higher in 
California than in New York. When a capitalist is making large 
Profits, he is eager to extend his business, to employ more hands, 
and consequently he offers higher Wages. A fall in Wages is 
symptomatic of a decline in biisiness, and a general depreciation 
of Profits. Fawcett, an English Economist, says (in 1865), "it 
is quite certain that, dm-ing the last few years, emigration has 
produced a very considerable advance in the Wages of all our 
laborers, and yet I believe that the rate of Profit obtained by 
employers has increased, instead of being reduced." 

But it should be distinctly understood, that we here mean by 
Wages, not the proportion of the finished product that falls to the 
laborer, but the amount, the quantity and quality, of the com- 
modities which he can purchase with the results of his day's 
labor. If a journeyman carpenter is able to buy one fourth of 
a barrel of flour with his day's wages, while a seamstress can 
obtain only one tenth of a barrel with hers, then the Wages of 



208 PROFITS. 

the foi-mer are two and a half times greater than those of the lat' 
ter ; and this would be true, though the carpenter received only 
80 per cent of what his day's work sold for, while the seamstress 
was paid 90 per cent of the value of hers. In like manner, 
" Profits are not measured by the proportion which they bear to 
the rate of Wages, but by the proportion which they bear to the 
capital by the agency of which they have been produced." If a 
farmer, to borrow Mr. McCulloch's illustration, employs a capital 
amounting to 1,000 bushels of grain, paying 700 of it for Wages, 
and 300 for seed and other expenses, then, if the return at the 
end of the season be 1,200 bushels, his Profit is 200 bushels, and 
his rate of Profit is 20 per cent. Mr. Ricardo would say, that 
the total product, 1,200 bushels, is divided into Profits and Wages 
in the proportion of 5 to 7, inasmuch as the laborers received 
seven twelfths of it, and the capitalist only five twelfths ; — a doc- 
trine which is correct as he understands it, but which is calcu- 
lated only to mislead, if words are taken in their ordinary mean- 
ing. 

Again, a capitalist may receive 90 and the laborer only 10 
per cent of the finished product, say, of one barrel or one coat. 
And yet Wages may be very high, for the laborer may manufac- 
ture 10 barrels or 10 coats in one day, and so receive great gains. 
Rate of Profits is determined by proportion of amount received to 
Capital employed; but rate of Wages, by proportion of amount 
received to Time employed. 

Several things are usually confounded under the iiame of Profit, 
which must be clearly distinguished from each other before we 
can gain a clear view of the circumstances on which the rate of 
Profit, at any given time and place, depends. The general prin- 
ciple is, that Profits tend to an equality in all employments and in 
all localities. I do not say that they are equal, or that they 
must become equal. But an equalizing process is constantly going 
on ; for if the gains in one department of enterprise are notori- 
ously above the average, — if it is even suspected by a multitude 
of sharp-sighted observers, who are on the lookout for such oppor- 
tunities, that they exceed the average, — more capital is at once 
attracted into the employment, till, by the competition of the 
capitalists with each other, the rate of Profit is reduced to the 
common standard in other enterprises. 



PROFITS. 209 

But though Profits tend to an equality in different employ- 
ments, it is equally certain that there is a great seeming inequal- 
ity in them, most of which can be readily explained by a reference 
to the several really distinct elements which are usually con- 
founded under the general name of Profits. Thus, among those 
who superintend the application of capital, — entrepreneurs the 
French call them, managers is the nearest English appellation, for 
they are not always the otvnei's of the capital which they manage, 
— there is every degi'ee of skill, enterprise, and intelligence; the 
gains vary, of course, in proportion as these faculties are exercised. 
The prudent and sagacious merchant makes a fortune out of the 
very business from which a dozen of his competitors may retire as 
bankrupts. Only those who ai*e successful continue in the busi- 
ness for a long time ; and the average of the gains of such persons 
is found greatly to exceed the ordinary rate of Profits. Obviously, 
however, their gains are not all to be reckoned as Profits, strictly 
so called ; a large portion of them are to be considered rather as 
the Wages of labor, or as the salary paid to an unusually skilful 
person for managing the concern. This portion — the loages of 
management — being deducted from their total gains, it is only 
the remainder which can properly be regarded as Profit, and can 
have its rate compared with the rate of Profits in other employ- 
ments, with which it will be found to agi'ee. These Wages for 
skilful management often rise to a very high point ; some railroad 
and manufacturing corporations have found it for their advantage 
to pay to their general agent or manager a higher salary than the 
government of the United States paid to its Minister to Great 
Britain, or than it now pays to the Chief Justice of our Supreme 
Court. If this person, instead of acting as an agent for others, 
should enter into business on his own account, and trade with his 
own capital, we ought to subtract $ 10,000 a year from his annual 
gains, before those gains are considered as any indication of the 
general rate of Profit in his business. 

Again, the risk incurred varies much in different employments. 
If, in a particular business, three ventures out of four fail alto- 
gether, or result in a loss, the gains of the fourth venture, on an 
average, must be high enough to compensate for all these losses, 
and to afford at least the ordinary rate of Profit for the capital 
required during all the time which is consumed by all four 
14 



210 PROFITS. 

ventures. During the war of the Rebellion, the gains of blockade- 
running between Nassau and the coast of the Carolinas were so 
great, that though three ships out of four were captured or lost, 
the Profit on the return cargo of the fourth ship was large enough 
to make the business a lucrative one to the merchant. The true 
rate of Profit, then, must be calculated only after one deduction is 
made from the total gains as insurance against loss, and another 
for Wages of management. 

But here another element comes in to modify our calculations, 
— an element already once mentioned as " the lottery principle in 
human nature." So much does the prospect of splendid gains 
outweigh, in the estimation of sanguine and adventurous persons, 
the chances of loss, that an undue proportion of capital is attracted 
into some very uncertain employments, and the rate of Profit in 
them is consequently reduced to a very low point, — often, indeed, 
to nothing or less than nothing. There is no doubt that the 
average gains in a trade in which large fortunes may be made, — 
in our own flour-trade, for instance, or in stock-jobbing, — • " are 
lower than those in which gains are slow, though compara,tively 
sure, and in which nothing is to be ultimately hoped for beyond a 
competency. In such points as this, much depends on the char- 
acters of nations, according as they partake more or less of the 
adventurous, or, as it is called when the intention is to blame it, 
the gambling spirit. This spirit is much stronger in the United 
States than in Great Britain ; and in Great Britain than in any 
country on the Continent of Europe. In some Continental coun- 
tries, the tendency is so much the reverse, that safe and quiet 
employments probably yield a less average Profit to the capital 
engaged in them than those which, at the price of greater hazards, 
offer greater gains." 

The moral character of individuals — or, at any rate, the esti- 
mation in which they are held in the community - — is affected by 
the comparative prevalency of the gambling spirit. Here, the 
standard phrase for a " failure," or an act of bankruptcy, is " mis- 
fortune in business " ; — that is, fortune only is blamed, the indi- 
vidual is pitied, and the sympathy of his companions and former 
rivals helps him to try again. The reason why the act is so le- 
niently viewed is, that it is so frequent ; no one can conscientiously 
blame his neighbor for what is so likely to happen to himself, — for 



PKOFITS. 211 

what, perchance, has happened to himself more than once. Still, 
in estimating the Profits of trade as compared with those of agri- 
culture, the professions, and the mechanic arts, the number and 
amount of such failures must be taken into view, or our calcula- 
tions will be very wide of the truth. The prevalence of this 
speculating or gambling spirit is undoubtedly one of the reasons 
why the rate of interest in this country continues so high ; lenders 
are affected with it as well as borrowers, and will incur great haz- 
ards when tempted by usurious rates. 

In England, bankruptcy is a more serious matter. The bank- 
rupt not only loses credit ; he also, to a great extent, loses caste. 
He is a dishonored man, whose sense of personal degradation is not 
infrequently so keen as to drive him to suicide. Sydney Smith 
wittily remai'ks, that an Englishman's idea of Paradise is a place 
where people always pay their debts. Hence tlie opprobrium in- 
curred by our repudiating States was so much greater in England 
than in this country, and w^as expressed with so much bitterness 
as absolutely to goad and sting the defaulters into a sense of the 
heinousness of their act, and an attempt to retrieve their reputa- 
tion. And yet, serious and wholly indefensible as was the breach 
of faith on the part of the defaulting States, the complaints of the 
English bond-holders were exaggerated and unreasonable. They 
knowingly incurred a greater risk, for the sake of obtaining a high- 
er interest ; they deliberately preferred investment at considerable 
hazard in American fimds at six per cent, to a perfectly safe invest- 
ment in English government funds at three per cent, and therefore 
had comparatively little ground for complaint when a portion of 
their hazardous investment turned out unfavorably. 

In France, the lot of the bankrupt is still more severe ; he not 
only loses his social position, but the law prevents him from en- 
gaging in any other business on his own account till he has re- 
deemed his outstanding obligations. 

I have dwelt upon these circumstances affecting the rate of 
Profits, because they illustrate the principle already stated, that 
the theory of Political Economy is biit an exposition of human na- 
ture as it appears when engaged in the pursuit of wealth. The 
rate of Profits varies according to the opinions, and habits of mind 
and action, of those who apply capital to productive uses. The 
money-getting propensity is but one tendency or phasis of human 



212 PROFITS. 

nature, and it is constantly modified and controlled by the other 
passions and habits of men, with which it is blended, and among 
which it is by no means the strongest. 

Another illustration of this general principle is found in a cir- 
cumstance just alluded to, — the extraordinary fluctuations of the 
grain and flour market in this country, — fluctuations which are 
so great and frequent as to put all calculation at defiance, and to 
make the gains of the dealers nearly as uncertain as the chance of 
drawing a prize in a lottery. As the results of successful specula- 
tion in this branch are very brilliant, and as bankruptcy is no 
disgrace, the business is probably more overdone — that is, the 
average rate of profit is lower — than in any other enterprise 
whatsoever. Flour may be five dollars a barrel in New York at the 
beginning of the season, may rise to twelve dollars in the course of 
the summer, and fall even below its starting-point when the next 
crop comes in. The effect of such changes as these on the busi- 
ness of a dealer who has a stock of a quarter of a million of bar- 
rels at a time may be easily seen. He may literally gain or lose 
one or two millions of dollars in one season. How are such fluctu- 
ations possible? At the fii'st sight, it would appear that the 
price of breadstuff's would be the most stable of all prices. The 
quantity needed, the number of mouths to be satisfied with food, 
varies by a fixed and well-known law of increase from year to 
year. The average crop over a coimtry so extensive as this varies 
but little ; a bad harvest in one State is compensated by an unusu- 
ally good one in another. And should there be any marked defi- 
ciency or excess, foreign commerce stands ready, as usual, to 
equalize the market by distributing the aggi'egate product uni- 
formly where it is most needed. 

But the vast quantity of the article which is produced and con- 
sumed every year, and the fact that it is also an article of prime 
necessity for all classes of people, introduce a new element into 
the calculation. The hopes and fears of men are strongly excited 
in relation to a product on which not merely comfort, but life, 
depends, and the use of which is absohitely universal. Its price 
rises and falls, not merely in proportion to the deficiency or ex- 
cess of the crop, but to the alarm and the spirit of speculation 
which are excited by that deficiency or excess. A failure of one 
sixth of the crop, instead of raising the value in the market only 



PROFITS. 213 

in that proportion, will often double the price ; a surplus of not 
more than an eighth of the average annual harvest may sink the 
price below the actual cost of production. A mei'e rumor of an 
apprehended partial failure of the crop in England has power to 
raise the price of grain and flour from five to twenty per cent on 
the banks of the Ohio. Necessaries must be had at any cost, so 
that their price will rise in a higher proportion than the diminu- 
tion of the supply. But the price of luxuries will be more stable, 
as any considerable enhancement of their cost induces many per- 
sons to give up the use of them altogether. 

AVhat Mr. Mill calls "the perpetual overflow of capital into 
colonies or foreign countries, to seek higher profits than can 
be obtained at home," is certainly a powerful agent in equalizing 
the rates of Profit in different lands. But that it is not so efficient 
for this purpose as we might be tempted, at first thought, to 
imagine, appears from the notorious fact, that the rate of interest 
for money is twice as high here as in Great Britain. This dif- 
ference of rate would be greater than it is, if British capital 
were not occasionally sent hither in large amounts. But why 
is not the migration sufficient to equalize the I'ates at once, since 
every man would prefer to receive six, rather than three, per cent 
for his money ] 

Several answers may be given to this question. In the first 
place, the capitalist is not often willing to emigrate along with his 
capital. He is bound to his native soil by many ties of feeling 
and interest, which he cannot easily sever, and which, being 
at any rate in easy circumstances, he is under no strong tempta- 
tion to break. He must be separated from his property, then, 
and the distance of the place of investment, other things being 
equal, enhances the risk ; no one likes to trust his capital in 
opei'ations that he cannot oversee, to individuals of whom he 
knows but little, or to places where it will be controlled by laws 
and institutions differing from those with which he is familiar. 
War may possibly break out between the two countries, or their 
peaceful relations be so far disturbed that the profits cannot 
be remitted with regularity, or perhaps the principal itself 
may be lost. Lastly, the sentiment from which no man is 
entirely fi-ee — a sentiment which may be dignified by the name 
of patriotism, or branded as national prejudice — prevents the 



214 PEOFITS. 

credit of foreigners from being fairly estimated. Public affairs 
may be more widely and accurately known than private enter- 
prises ; foreigners, therefore, usually prefer government stocks to 
other means of investment. Next to these, chartered companies, 
whose transactions are large and of a public character, enjoy a 
preference. 

But on the whole, capital is every day assuming more of a 
cosmopolitan character, and the time when the rates of interest 
will become nearly equal in all commercial countries cannot be 
far distant. " The inequality in the rate of Profit throughout the 
civilized world," says Mr. Senior, " is much less than the inequal- 
ity of Wages. And as the general progress of improvement tends 
more and more to equalize the advantages possessed by different 
countries in government and habits, and even in salubrity of 
climate, the existing inequalities of Profits are likely to diminish." 

In English systems of Political Economy, the theory of the 
circumstances which determine the average rate of Profit, as well 
as the doctrine respecting the average rate of Wages, is a deduc- 
tion from the theories of Malthus and Eicardo respecting Popula- 
tion and Rent. English writers upon the subject are ambitious to 
erect Political Economy into the rank of a deductive science. 
They begin with a few postulates or universally recognized facts ; 
they trace these to their consequences, under the law of competi- 
tion, by a course of abstract reasoning ; and they attempt to make 
the results thus obtained square with observed facts by the method 
of exhaustion, — eliminating, evading, or explaining away all the 
phenomena that do not coincide with the theory. This method 
has elevated some startling paradoxes into the dignity of first 
principles of the science ; he who does not possess the key to 
them, or is incapable of explaining them by reference to the very 
few and simple facts which alone are admitted to be the proper 
data of the science, is held to be unworthy of mingling in the dis- 
cussion. Hence an offensive tone of assumption and dogmatism 
has crept into the writings of the expounders of the system, and 
the breach between scientific Economists and practical business 
men is unnecessarily and injuriously widened. We hold that the 
better method is to begin with a large induction of facts, and to 
reason from these up to the principles of hximan nature from 
which they proceeded, and in which they find their explanation. 



PROFITS. 215 

Some of these paradoxes we have ah-eady reviewed, and traced 
them to their origin in the assumptions, or arbitrarily limited 
definitions, which have been made the basis of the science. Thus, 
it is assumed that the growth of the Population everywhere tends 
to outrun the increase of the means of subsistence ; and the infer- 
ence is, that the natural or necessary standard of Wages is the 
smallest sum that will furnish the laborer with what his class in 
society regard as the necessaries of life. It is assumed that the 
most fertile soils are always the first to be cultivated, and that 
the Population, as it increases, remains on the same spot ; and the 
inferences are, that additional food is always obtained at a disad- 
vantage ; that additional capital can never be applied to the land 
but with constantly diminishing returns ; and hence, that the 
increase of the Population anywhere, and under all circumstances, 
is an evil ; — a paradox of the most startling kind, inasmuch as the 
common sense of mankind has everywhere taken it for granted, 
that the rapid gi-owth of the Population is one of the mo.st unfail- 
ing indications of great prosperity. Profits are arbitrarily defined 
to be, what remains to the capitalist from a division of the whole 
value created between him and the laborer. Rent having been pre- 
viously deducted ; and the inference is, that high Wages and high 
Profits are incompatible ; whereas it is matter of the commonest 
observation, that they vary together, high Wages being incompati- 
ble with low Profits. Again, it is assumed that individuals are 
always the best judges of their own interests, that nations are com- 
posed only of individuals, and that individual and national interests 
are identical ; and it is inferred, that, as it would be unwise to place 
restrictions upon trade between individuals, so it would be impolitic 
to put any fetters upon international commerce ; but that a little 
kingdom like Denmark should be exposed, in every branch of her 
industry, to the overpowering competition of the immense capital 
and other resources of a great nation like England. Yet it is certain, 
as Mr. Rea remarks, that individual and national interests ai-e not 
always identical, because individuals often grow rich by the acquisi- 
tion of wealth previously existing, but nations by the creation of 
wealth that did not before exist ; and we have already seen (pp. 30, 
31) that private persons may be impoverished by the conversion 
of artificial into natural wealth, though nations are always bene- 
fited by this process. 



216 PROFITS. 

But we return to a consideration of the circumstances that de- 
termine the average rate of Profits. The phenomenon which needs 
to be explained by any theory upon this subject is the gradual but 
sure declension of the rate of Profit in all countries, as their pop- 
ulation and wealth are augmented. The growth of national opu- 
lence resembles that of the human body. It is most rapid in in- 
fancy, the body usually doubling in weight during the first year of 
its existence. In early childhood, the growth is still quick, though 
not so rapid as at first ; and it steadily declines, as the child ap- 
proaches maturity, till at last it reaches its stationary point in full 
manhood. Adam Smith long ago remarked, that in a new colony, 
which is " more understocked in proportion to its territory, and 
more underpeopled in proportion to the extent of its stock, than 
the greater part of other countries," Profits are very large, and the 
rate of interest is consequently high. " As the colony increases, 
the Profits of stock gradually diminish " ; and " in a country fully 
stocked in proportion to all the business it had to transact, the 
competition would everywhere be as great, and consequently the 
ordinary Profit as low, as possible." 

Thus, in California, soon after its cession to the United States 
and the discovery of its gold-washings. Profits rose with unexam- 
pled rapidity, and the current rate of interest was from thirty-six 
to forty-eight per cent a year. These extravagant rates, however, 
soon began to decline, and they are now not much higher than in 
New York. Similar changes have taken place in Australia, since 
the discovery of gold in its southern region. I have already ob- 
served, that the rate of interest in England, which was over ten 
per cent in the early part of the sixteenth century, slowly but 
steadily declined, till it reached its present ordinary rate of three 
per cent. I have also cited the case of Holland, which seems to 
have attained the stationary state over a century and a half ago. 
The rate of interest there, on government security, had then fallen 
to two per cent, the lowest point ever generally established 
through a whole country that is known in the history of commerce. 
For fifty years before this stage was attained, — that is, during the 
latter half of the seventeenth century, — the Dutch were the most 
active commercial and manufacturing power in the world. Their 
colonics were scattered over both hemispheres, and their sails 
whitened every sea. They had almost exclusive control of the 



PROFITS. 217 

carrying-trade, and the Navigation Laws of the English were en- 
acted for tlie avowed purpose of wresting a portion of this traffic 
from them. Having touched the zenith of their fortunes, the 
Dutch did not begin to decline, but simply remained stationary, 
while other nations, England especially, have in their turn risen to 
be masters of the commercial world. 

And the same cause which opposes a necessary limit to the 
growth of national opulence, and whicli long ago checked the pro- 
gress of Holland, threatens now to stay the course of English pros- 
perity. There are the same symptoms of a relaxation of the 
energies of the system, as the organs become distended with over- 
abundant wealth. The rate of interest is with difficulty maintained 
at a point above that where it rested in Holland a hundred and 
fifty years ago ; the Bank of England is now often driven to dis- 
count private paper at only two and a half per cent. But for the 
overflow of English coital into colonies and foreign countries, and 
for a commercial crisis, which often sweeps away a great amount 
of capital to the manifest advantage of what is left, just as a gush 
of blood from the nose sometimes relieves a patient who is in 
danger of apoplexy, the tide would have turned in Great Britain 
some time since, leaving the people not exhausted, but satiated. 
During the last thirty years, the English have thrown away capi- 
tal enough upon South American and Mexican mines, Spanish and 
Greek funds, and railroads, to serve as a good basis for the opu- 
lence of another country of equal population. Fawcett says, " Eng- 
land supplied £13,500,000 for the Grand Trunk Railway of 
Canada; and since 1853, we have subscribed £40,000,000 for 
Indian Railways." 

This constant downward tendency of the rate of Profit is a phe- 
nomenon to be explained, for it is the opposite of what we were 
prepared to expect. As capital accumulates, experience is enlarged 
and skill perfected ; it would seem, then, that labor, being more 
abundantly supplied with the means for its most effectual exercise, 
would be most successfully applied, and would produce the largest 
and most profitable results. True, the prices of commodities fall 
as the cost of their production is diminished. But there seems to 
be no reason why they should fall moi-e rapidly than the cost of 
the articles declines ; and therefore we cannot see, at the first 
glance, why the rate of Profit should be diminished, — why it 



218 PROFITS. 

should be less than when men work at great disadvantage, under 
all the privations and difficulties incident to the attempt to found 
a new colony. 

Adam Smith ascribes this fall of Profits in some measure to the 
competition of capitalists. " "When the stocks of many rich 
merchants," he says, " are turned into the same trade, their 
mutual competition naturally tends to lower its Profits ; and when 
there is a like increase of stock in all the different trades carried 
on in the same society, the same competition must produce the 
same effect in them all." But the objection is properly made, 
that competition can tend only to equalize Profits in different em- 
ployments and different places. It can make the Profits of cotton- 
spinning equal to those in the iron manufacture, and can reduce 
the gains' of merchants in New York to a level with those in 
Boston ; but it furnishes no reason why the average rate of 
Profit in all employments, and at all places, should be depressed. 
To produce this effect, there must be something to come into com- 
petition with capital itself, — some other agent, which shall render 
industry equally effective ; and we have no such agent, and cannot 
even conceive of one. 

Ricardo and his followers attempt to solve the problem by 
reasoning, in their peculiar way, from a few assumptions. With 
them, as I have said, the doctrine of Profits is a deduction from 
the Malthusian theories of Population and Rent. The value of 
every commodity being divisible into the three elements of Rent, 
Wages, and Profits, whatever cause tends to augment the two 
former, or even to increase but one of them without an equivalent 
reduction of the other, must certainly lessen the third element, 
which is all that remains for Profit. Such a cause is found in the 
necessity, created by an ever-increasing population, of constantly 
having recourse to inferior soils, and thereby of perpetually aug- 
menting the Rent of the lands which were previously under 
cultivation. But if Rent is increased, there remains a smaller 
portion to be divided between Wages and Profits. Still further ; 
there is a limit to the depression of Wages, but there is none to 
the fall of Profits. The natural and necessary rate of Wages, ac- 
cording to these theories, as has been already explained, is the 
smallest sum that will supply the laborer and his family with 
*yhat are believed to be the necessaries of life. As the cost of food 



PROFITS. 



219 



is increased, therefore, by the necessity of cultivating inferior land, 
the expense of supplying the laborer with food is also increased, 
and his Wages must rise. The portion remaining for Profit is 
thus diminished, as it were, at both ends ; as the Population in- 
creases in number, from the value of every commodity a con- 
stantly inci'easing share must be cut off for Rent, and another 
regularly augmented portion must be deducted for Wages. Obvi- 
ously, but a small portion, and that perpetually becoming less, 
remains for Profit. " In one brief formula," says Mi*. De Quincey, 
" it might be said of Profits, that tliey are the leavings of Wages ; 
so much will the Profit be upon any act of production, whether 
agricultural or manufacturing, as the Wages upon that act permit 
to be left behind." 

The following diagram, also borrowed with some modification 
from Mr. De Quincey, may not onl}^ make this clearer, but may 
illustrate the peculiar character of Ricardo's reasoning, — the 
strict, logical deduction from a few arbitrarily assumed premises, 
little or no regard being paid to the modifying circumstances in a 
case which is obviously a very complicated one. 



No. I. 100 bushels 
to the acre. 

No. II. 90 bushels 
to the acie. 

No. III. 80 bushels 
to the acre. 

No. IV. 70 bushels 
to the acre 



Here No. I., the upper parallelogram, represents land of the 
first quality, yielding one hundred bushels to the acre. As soon 
as No. II. is called into use by the increased demand for food, the 
increased price of that food will pay ordinary Profits and Wages 
for the cultivation of land yielding only 90 bushels an acre; 
and therefore r', representing 10 bushels an acre, will be left for 
the rent of No. I., though it yielded no rent before No. II. was 
cultivated. But this enhanced price of food renders necessary 
also an advance of Wages, because the Wages formerly paid were 
barely sufficient to purchase the necessary food for the laborer's 
family at the old price. Hence this increment of Wages, repre- 



w 






P 






R' 


w 


w'i 




P 




R" 




w 


w'jw" 




P 


R'" 






w 


w'iw" 


W'": 


P 







220 



PROFITS. 



sented bj w', must also be cut off from P, which is at the same 
time lessened by the deduction of e'. When a further increase of 
the population brings into use No. III., yielding only 80 bushels, 
both r' and r", representing 20 bushels, must be deducted from 
No. I., and r", or 10 bushels, from No. II., for Rent. So, also, 
w" must be deducted for a further rise of Wages. In like man- 
ner, when No. IV. is broken up for tillage, r', r", and r'" will be 
paid for Rent on the soils of a higher quality, and w', w", and w'" 
will be the successive additions to the original rate, W, of wages. 
So long as No. IV. is the poorest land in cultivation, its whole 
produce will be absorbed in the payment of Profits and Wages, 
and nothing will be left for Rent. 

The preceding diagram is constructed only to show the successive 
deductions that are made from Profits to pay Wages and Rent. 
It does not represent the whole state of the case, after tillage has 
been brought down to No. IV. ; for as there can be but one rate 
of Wages at the same time, w', w", and w'", or the successive in- 
crements of W^ages, must be deducted from the three higher 
classes of soils, as well as from No. IV. The following construc- 
tion, then, shows how little remains for Profits after No. IV. has 
come into use. 

a e d b 



No. I. 


W 


w' 


w" 


w'" 


p 


R'" 


r" 


R' 


No. IT. 


W 


w' 


w" 


w"' 


p 


R'" 


r" 




No. III. 


w 


w' 


w" 


w'" 


p 


r'" 






No. IV. 


w 


w' 


w" 


w"' 


p 







Hei-e P, representing Profits, extended from a to 6 when only 
No. I. was in cultivation, but reaches only from c to d after tillage 
has descended to No. IV. 

This diminution of the rate of Profits must go on indefinitely, 
so long as the increase of the population obliges us to have re- 
course to soils of constantly diminishing fertility. Rent at the 
same time will be proportionally augmented ; the landholder wiU 
receive not only a larger portion of the total product, but the 
price per bushel of the whole product will be augmented. Wages, 



PROFITS. 221 

however, will be only nominally increased ; the successive incre- 
ments, w', w", w'", cannot be more than enough to pay the en- 
hanced price of food which caused them. In fact, they will not 
suffice to pay the new price, because the laborer will submit to 
live on a smaller quantity of food, or on food of a coarser 
quality ; for while food is becoming dearer, the constant tendency 
of tl:te population to increase is adding to the competition in the 
labor-market, so that Wages cannot rise in full proportion to the 
higher cost of food. 

Thus far, it would seem that the new rates of Wages and 
Profits would be established only in agriculture, where alone 
a necessity for them appears to have been created. But a little 
reflection will show that they must extend equally to all employ- 
ments of industry and capital. The enhanced price of food must 
raise Wages throughout the country ; and competition must 
equalize Profits. If the returns for the employment of capital 
were smaller in farming than in commerce and manufactiires, 
capital would be diverted from agriculture till the balance was 
restored. Furthermore, the increased cost of the raw material, 
which is always obtained more or less directly from agi'iculture, will 
directly lessen the Profits of the manufacturer ; for instance, " even 
upon shoes there will be a small increase of labor, because the 
raw material will gi'ow a little dearer as hides grow dearer; 
and hides will grow dearer as cattle grow dearer, by descending 
upon worse pasture-lands." 

There is but one possible check upon this descent of agriculture 
to inferior soils, and the consequent declension of Profits, augmen- 
tation of the price of food, and increase of Rent. This is the 
progress of agricultural improvements, by means of which more 
food is obtained from the same quantity of land, or the same 
amount of food is procured by a smaller expenditure of labor 
and capital. In this way, the wants of an increasing population 
may be provided for without the necessity of bringing more land 
into tillage, or of applying capital with constantly diminishing 
returns. But this check cannot have any permanent influence ; 
it may postpone, but cannot finally avert, the consequences of a' 
steady growth of the population. 

It only remains to notice a corollary from this theory, in 
respect to the different manner in which this declining rate 



222 PROFITS. 

of Profits affects the comparative value of commodities produced 
in great part by Fixed Capital, and of those produced mostly 
by Circulating Capital. These two kinds of capital differ chiefly 
in point of durability; Circulating Capital is employed for the 
most part in the payment of Wages, and is very soon replaced by 
the fruits of the laborers' industry. Fixed Capital consists 
of tools and machines, varying in degree of durability, though all 
are consumed and replaced much more slowly than the elements 
of Circulating Capital. According as Fixed Capital has less 
and less of durability, so far it approximates the nature of Circu- 
lating Capital. Some commodities are almost exclusively pro- 
duced by the expenditure of capital, chiefly of Fixed Capital. 
Gunpowder, for instance, to avoid the hazard of human life, is 
manufactured by machinery moved by water-power in some 
retired place, the works being so contrived that the process is 
continued with very little superintendence. Boots and shoes, 
on the other hand, till recently, were made almost entirely 
by the labor of man ; machines were not used in their manu- 
facture, and the workman needed but few and simple tools. 

Now, a fall of Profits, as Mr. Mill remarks, " lowers in natural 
value the things into which Profits enter in a greater proportion 
than the average, and raises those into which they enter in a less 
proportion than the average. All commodities in the production of 
which machinery bears a large part, especially if the machinery is 
very durable, are lowered in their relative value when Profits fall ; 
or, what is equivalent, other things are raised in value relatively 
to them." Recurring to the diagram, we see that Wages rise 
while Profits fall, though not in the same proportion; the fall 
of Profits, owing to the deduction of Eent, being more rapid than 
the rise of Wages. For a double reason, then, as population 
advances, and inferior soils are brought into cultivation, gun- 
powder, and other articles the value of which consists mostly 
of Profits, fall in price when compared with boots and shoes and 
other commodities, the value of which consists chiefly in Wages. 
The elements of the former are declining, at the same time that 
the elements of the latter are rising, in comparative value. 

We need not pause here to show that this theory of Profits is 
unfounded, and that its results do not harmonize with observation 
and experience. The whole theory rests upon a few premises, 



THE THEORY OF GLUTS. 223 

which have ah-eady boeu examined and shown to be mere assump- 
tions, paradoxical in appearance, and having no foundation in fact. 
Il is not true, that the increase of the population tends to outrun 
the supply of food, or that it compels us to have recourse to infe- 
rior soils, or that it necessarily increases the competition of laborers 
for employment. Food does not become dearer, but is cheapened, 
by the growth of the population ; the districts which are most re- 
cently brought into cultivation are not the least fertile, but are 
often more productive than those which have been peopled and 
tilled for centuries ; and the capital which is applied to them 
generally i/ields a larger return than that which is employed in the 
old settlements. It is not even necessary, as the people increase 
in numbers, to send to a greater distance for food ; but emigration 
distributes the people, and commerce distributes the food, where 
both are most needed, the combined result being that each genera- 
tion is more fully supplied with the means of subsistence than its 
predecessor. The only inequality to be feared is that which is 
sometimes caused by human institutions, in the distribution of 
property ; and the only famine which is possible in modern times, 
and among civilized nations, is produced by poverty, and not by a 
deficient supply of food. 

The premises of Ricardo's theory being thus proved to be base- 
less, the entire superstructure falls. The whole is a mere exercise 
of logical ingenuity, a long series of deductions being obtained from 
a few definitions and hypotheses, which have no foundation in ex- 
perience, and no applicability to the circumstances of the present 
time. The original phenomenon to be explained — the declension 
of the rate of Profit as society advances in numbers and wealth — 
presents little difficulty, when we regard the limited extent of the 
field for the employment of capital. 

Mr. Wakefield was the first among English Economists to notice 
the seemingly obvious fact, that, in every country, the field for 
the employment of capital is of limited extent. The first intro- 
• duction of capital into such a field is attended with very large re- 
turns ; but as the amount of it increases, the rate of Profit falls off; 
and when the limit is attained, or so nearly attained that Profits 
have fallen to a minimum, accumulation ceases, there being no lon- 
ger any sufficient motive for the exercise of frugality. With an 
evident desu-e to reconcile this fact to the theories of Malthus and 



224 THE FIELD FOR THE USE OF CAPITAL. 

Ricardo, -with which it appears to conflict, Mr. Mill states the 
principle thus, — that " on a limited extent of land, only a limited 
quantity of capital can find employment at a Profit." Thus enun- 
ciated, it seems to be only a corollary from Ricardo's doctrine of 
Rent, which expressly affirms that successive applications of cap- 
ital to the same quantity of land can be made only with succes- 
sively diminishing returns. It will appear, however, that the extent 
of territory is not the only, or even the chief, limiting circum- 
stance ; but that the proper, restriction is to be found in the mag- 
nitude of the wants of the people, as determined, 1, By their num- 
bers ; 2. By the degree of civilization under which they live ; and, 
3. By the greater or less inequality of the distribution of property 
among them. 

But observe that we are here speaking of a limit to the prof- 
itable employment of capital. Some distinguished Economists, 
among whom are Sismondi and Malthus, have maintained that 
there may be a general over-production of wealth, — "a supply of 
commodities in the aggregate exceeding the demand, and a conse- 
quent depressed condition of all classes of production." We are 
all familiar with the fact, that there is often, in the market, a glut 
of a particular commodity, or of several commodities at once. 
Such a glut can be only temporaiy, for since its tendency is to de- 
press the price below the cost of production, a smaller quantity of 
the article will be produced, and the market will thus be relieved 
of its burden. Prices are adjusted, and the current of productive 
means and productive energy is turned from one commodity to 
another, through the indications afforded by such instances of glut 
or over-supply on the one hand, and of dearth or scarcity on the 
other. But the doctrine of these Economists is, that there may be 
a general glut, or that the disposition and the ability to produce 
may outrun the ability of the nation to consume. The disposition 
to consume, of course, is coextensive with the disposition to produce. 
But the ability to purchase, or, ie other words, the active and effi- 
cient demand, it is supposed, may so far fall below the supply, that » 
there will be a general depression of prices and general distress. 

On the other hand, it has been contended, with great force, that 
a general glut is impossible ; for every article brought to market is 
a source both of supply and demand, — the owner of it always 
wishing to exchange it for something else of equal value, so that 



THE THEORY OF GLUTS. 225 

his desire to ptirchase contributes to lighten the market to precisely 
the same extent to which he burdens it by his desire to sell. No 
man appears exclusively in the character of a seller ; he is a buyer 
also, and he buys to the same extent to which he sells. If he 
brings a bale of cloth to market, for instance, it is because he 
wishes to exchange it, in the first place, for money. But this 
money he does not intend to keep in reserve, in order to increase 
indefinitely his store of it. He knows very well, that, if the money 
remains idle in his chest, it will yield neither interest nor profits. 
He will aim, therefore, to expend it as soon as possible, — either 
to buy articles of comfoi-t or luxury for his own unproductive con- 
sumption ; or to purchase raw material, tools, machinery, seed- 
corn, or the like, with a view to further production ; or, lastl}'', he 
may lend it to another, who, by investing it pi-oductively, — that 
is, by making purchases with it, — will be enabled to pay him in- 
terest for its use. In either way, the money is expended ; pur- 
chases are made to the full extent of the original sale. If the 
seller chooses to lend the money to a bank, instead of trusting it 
to an individual, the result is the same. The bank immediately 
lends it over again to some person who wishes to enlarge his stock 
in trade by buying more commodities. 

This reasoning is quite conclusive against the possibility of a 
general glut ; but it must be applied with two important limita- 
tions. First, it goes upon the supposition, that the laws and other 
institutions of the country admit the freest possible interchange of 
all articles of wealth. If there be a monopoly of any one article, 
if only a few persons are privileged or enabled to produce and sell 
it, and especially if this article be one of prime or universal neces- 
sity, — then there may be a glut, or over-pi-oduction, of all other 
articles with reference to this one. To illustrate this point, I will 
take the most general case. All articles that are offered for sale 
or exchange may be roughly divided into two classes, according as 
they are articles of manufocture or products of agz'iculture. The 
latter are chiefly articles of food, and the demand and supply of 
food, as we have seen, are regulated by causes peculiar to itself, 
wholly iiTespcctive of the presence or absence — the high or low 
prices — of other commodities. The demand for agricultural 
products depends on the number of appetites to be satisfied, and 
can only be enlarged by an increase of the population, or dimin- 
15 



226 THE FIELD FOR THE USE OF CAPITAL. 

ished by the population becoming smaller; the supply of these 
products is determined by the extent of territory capable of culti- 
vation, and by improvements in the modes of husbandry. Neither 
of these sources of supply can be increased at will, or on demand ; 
the land, in such a country as Great Britain, is all owned and 
occupied, and the number of acres is limited ; improvements 
in agriculture are made by the progress of discovery and inven- 
tion, and not merely because they are needed to feed the people. 

Now, manufactures must be exchanged for food, and conse- 
quently they may be produced in too great abundance ; there is 
no limit to their increase, but there is a limit to the supply of 
the only article for which they can be bartered. And we cannot 
here say, as in the case of a particular glut : " Transfer your 
capital and industry from the article of which there is a surplus 
to that of which there is a deficiency." In England, industry 
cannot be transferred from manufactures to agriculture ; the land 
is all owned and held at a monopoly price, and the landlords 
refuse to employ more labor upon it, even if a greater amount of - 
food should be produced by the introduction of more hands. They 
find, or think they find, that a greater 7iet product remains to 
themselves when few hands are employed, than when there are 
many. Hence they endeavor to get rid of a portion of the agri- 
cultural laborers, instead of increasing their number. The policy 
of most English landlords is to depopulate their estates, to make 
the peasantry give place to flocks and herds, as in the North of 
Scotland, or to compel them, by unroofing and tearing down their 
dwellings, as in Ireland, to emigrate to foreign lands. Thus they 
imitate the system which has been practised for centuries in the 
Roman Campagna, which reduced the fields of Italy in the age of 
Pliny to a desert, and subsequently surrendered them to the 
Northern barbarians because tliere were not men enough left to 
defend them. The dispossessed tenantry are obliged to emigrate, 
or are driven into manufacturing industry ; and thus the glut of 
manufactures is increased by the very causes which diminish the 
supply of food. True, food may be imported, as we have seen, 
even to an extent which is practically unlimited. But the very 
necessity for such importation, when it exists in a country whose 
agricultui'al resources are not yet developed to the utmost possible 
extent, proves that, in that country at least, there is already a 



THE THEORY OF GLUTS. 227 

glut of manufactures, and one which, in its effect ou the rate of 
Profits, would be very seriously felt, if there were not in other 
countries a glut of food. What actually exists in one nation, is 
possible in all nations ; if there be an actual glut of manufactures 
in Great Britain, such a glut is possible for the whole civilized 
portion of mankind. And this glut of manufactured products in 
England is not a consequence of the stinted boimty of nature 
in reference to agricultural products. The amount of food pro- 
duced there, from its own soil, is yet far from having attained its 
maxivium ; it might become as populous as Belgium, — that is, 
fifty per cent more populous than at present, — and yet not only 
feed all its inhabitants, but " produce commonly," as Belgiiun 
does, " more than double the quantity of corn required for the 
consumption of its inhabitants." 

In most civilized countries, at least two thirds of the woi'king 
population are engaged in agricultural pursuits, and but one third 
in manufactures and commerce ; and this proportion existed in 
England itself down as late as the reign of the Stuarts. But iu 
1821, only one third of the English population were engaged in 
tilling the soil. Twenty years later, or in 1841, there wei-e only 
about one fifth, and in 1861, but little over one sixth, thus em- 
plo^'ed, — a depopulation of the rural districts to the rapidity of 
which there is no parallel in history. There is no absolute 
deficiency either of land or food ; for both can be had in abun- 
dance, as has been shown, in other countries. But as there are 
obstacles which impede the emigration of capital, so there are 
those which obstruct in a still greater degree the eraigi'ation of the 
indigent portion of the people. Poverty — the very cause which 
renders it desirable for them to emigrate — also renders emigi-a- 
tion difficult, and often impossible. 

The second limitation of the doctrine that a universal glut 
is impossible, is founded on the division already made of all arti- 
cles of wealth into two classes. First, there are the articles which 
are designed for immediate consumption, and which directly satisfy 
the wants of man ; such as food and clothing, houses, and the com- 
forts and luxuries that gi'atify our tastes. And, secondly, there are 
the tools, implements, and raw materials, by means of which, or out 
of which, the former articles are made, but which, in their present 
shape, are not fitted for our immediate gratification and support. 



228 THE FIELD FOR THE USE OF CAPITAL. 

These two classes may be designated respectively as, 1. Finished 
products, and 2. Producing agents. The division bctv/een them, 
does not exactly correspond with that between, capital and the 
other portion of wealth which is not capital. All producing 
agents are capital, it is true ; but all finished products are not 
excluded from the definition of capital. A merchant's capital, for 
instance, often consists exclusively of commodities that arc com- 
pletely manufactured and ready for use ; a retailer's stock is 
generally of this character. 

It is evident that all wealth of the second class, all prodiicing 
agents, possess only a kind of secondary and derivative value ; 
they are prized, not for their own sake, but for what may be 
made out of them, or produced by their aid. And it is equally 
evident, that if the demand for commodities of the first class, 
finished products, is not coextensive with the demand for the 
second class of objects of wealth, or producing agents, then there 
must be an excess of supply, or a glut, of the former, and a 
consequent fall of prices and diminution of Profits. No one 
buys a plough or a loom for its own sake; for in itself it 
gratifies no feeling and satisfies no want. The one is valued only 
because it helps us to raise corn, and the other because it 
enables us to manufacture cloth. The only effect of the purchase 
of either, then, is, not to relieve . the market already glutted with 
corn and cloth, but to furnish prospectively a greater supply 
of both, and thus to increase the glut. 

We may admit, then, the force of the common argument, 
so far as it goes, against the possibility of a glut; and we 
may still deny that it covers the whole ground, or that it 
demonstrates the impossibility of any such excess of supply of 
one class of articles as cannot be remedied by diverting the 
sources of production to another class of commodities. We admit, 
that a capitalist who wishes to sell also wishes to buy; for to 
sell is to exchange, and the seller's disposition to part with one 
product is exactly measured by his disposition to obtain another 
of precisely equivalent value. But though he buys as much 
as he sells, it is not true that he always relieves the market 
by the former operation just as fast, and to the same extent, 
that he burdens it by the latter. We can easily see that he does 
not, in any one case of two articles corresponding to each 



THE THEORY OF GLUTS, 229 

other as finished product and producing agent. Suppose the 
market, for instance, to be already amply furnished with grain. 
One who brings to it an additional thousand bushels of grain 
to sell, occasions a glut of this article, and certainly does nothing 
towards relieving this glut by expending all the money which 
he received for grain upon the purchase of ploughs and other 
implements for clearing and breaking up moi'e land, and thus 
producing a larger harvest the next year. Or, if cloth enough 
is already offered for sale, the sellers of it will certainly occasion a 
glut of this article, if they exchange the whole stock of it for 
power-looms, and thus double or treble the quantity of cloth which 
■will be offered for sale the next month. The same reasoning 
is applicable to any other two commodities that are related 
to each other as finished product and producing agent. It is 
equally evident that it is applicable to all such cases, taken to- 
gether ; or, in other words, a general glut of finished j^roducts is 
possible, and such a glut cannot be relieved by diverting capital to 
other employments. Then a superabundance of capital, in refer- 
ence to the field for its employment, is possible ; and the inev- 
itable result of such a surplus is a diminution of the rate of 
Profit. 

Thus far, I have only proved that a glut of finished products is 
possible. The probability of its actual occurrence, I have already 
said, will depend upon the magnitude of the tvanfs of the j^eople, as 
determined, 1. By their numbers ; 2. By the degree of civilization 
which they have obtained ; and, 3. By the greater or less inequal- 
ity of the distribution of property among them. 

First, it is obvious enough, that the consumption of finished 
products in any countiy, other things being equal, will depend 
upon the number of its inhabitants. The demand for food is 
necessarily in proportion to the number of appetites to be sat- 
isfied ; and the other articles which are absolute necessaries of 
life must follow the same measure. Even the demand for 
luxuries will be determined in the same way, if the tastes and 
abilities of the people remain the same. 

Secondly, it is equally plain that the extent of the demand for 
finished products will be affected by the degree of civilization 
which the people have attained, and that, other things being 
equal, it will advance with the progress of refinement among 



230 THE FIELD FOR THE USE OF CAPITAL. 

them. The wants of the natives of the South Pacific Isles, 
when they were first visited by Europeans, were almost entirely 
supplied by the bread-fruit and cocoa-nut trees, and by yams and 
bananas. The bread-fruit tree alone supplied them with food, 
clothing, and the material for huts. When they learned from 
foreigners the existence of other comforts and luxuries, their 
wants rapidly multiplied ; the knowledge of the uses of iron alone 
opened a wide field for the industry that it created. Intercourse 
with China has created a demand all over the woiid for tea; 
coffee first came into common use in Europe in the eighteenth 
century; the discovery of America added tobacco, and many other 
articles, to the list of our wants. It would be diflicult to estimate 
the number of trades that have been created, and the number of 
persons who have found employment, through the diffusion of a 
taste for the fine arts. 

Thirdly, as an effectual demand is created only by the coex- 
istence of the disposition and the ability to purchase, its extent 
will depend upon the equality of the distribution of property. 
The two circumstances already mentioned affect only the magni- 
tude and prevalence of human desires ; and in the present state 
of civilization in Europe and America, it may be said that these 
desires are unbounded. But the ability to satisfy these desires 
exists in very different degrees. If this ability were equally 
diffused, no such thing as over-production would be possible ; the 
consumption of an individual, or a family, possessing a very mod- 
erate amount of wealth, certainly exceeds the productive power of 
such a person or family. On the other hand, the consumption of 
the greater part of the population of Europe is limited to mere 
necessaries, or to what the custom of the country regards as 
necessaries. If the demands of all were thus restricted, there 
would be a great surplus of productive power ; in the present 
state of invention, and with the present accumulation of capital, 
mankind might be idle probably more than half of the time. 
It is the luxury of the rich which offers the only vent for all 
finished products that exceed the definition of necessaries. This 
fact does not furnish any apology for such luxury ; for a more 
equitable division of the goods of this world would cause the sur- 
plus of productive power — all that is not needed for the creation 
of necessaries — to be expended in providing comforts and decen- 



THE THEORY OF GLUTS. 231 

cies for the bulk of the nation. But when property is vciy un- 
equally distributed, the luxury of a few must make up for the 
forced abstinence of many, or there will be a constantly increasing 
surplus of capital, which will manifest itself either by the forced 
emigi-ation of such capital, or by such a diminution of the rate 
of Profit as will take away all temptation to make additional 
savings. 

All will allow, that the productive power of every civilized 
nation already exceeds what is requisite for providing all the 
people with a stock of mere necessaries. Any excess beyond this 
point — whether such excess be created by the invention of new 
machineiy, or by the accumulation of fresh capital — must be 
directed towards the production of comforts and luxuries. It 
is a mere evasion, as we have seen, to say that it may be directed 
to creating more productive agents. Such additional agents will 
only increase the amount, perhaps already too great, of comforts 
and luxuries in the form of finished products. But when they 
have reached this form of finished products, they must either be 
consumed, or they Avill lie idle and rot ; no other use can be made 
of them. Now, I have admitted, that, if property — or 2^urchasing 
fower, which is the same thing — is pretty equally distributed 
among the people, the aggregate desire will take off and consume 
the aggregate product of comforts and luxuries, without causing 
any declension of Profits. On an average, each family would be 
inclined to consume all the products which, under a perfectly 
equal distribution of property, it would be able to produce ; and 
this would be enough to prevent Profits from falling at all. The 
only effect of the invention of new machinery and improved 
processes of manufacture would be to increase the stock of luxuries 
which each family might thus consume, or to give them more 
leisure time, which is in itself an additional luxury. Some would 
consume more, and some less, than this ; but the prodigality 
of the former would be balanced by the frugality of the latter, 
and the only effect would be the inequality of property that would 
thus be gradually induced. 

But suppose property to be very unequally distributed, only 
one himdred families now having all the wealth, and the whole 
remaining population being limited to the bare necessaries of life. 
As the productive power of the community will not be altered by 



232 THE FIELD FOE THE USE OF CAPITAL. 

this change in the distribution of property, there will be as many 
comforts and luxuries to be consumed as before, and it is evident 
that they must be consumed solely by the one hundred wealthy 
families. Now, suppose one of these families to be disposed to 
make savings, and thus to increase its productive power; it is 
certain that both the act of saving and the employment of the 
savings will tend to create a glut and to lower Profits. The act 
of salving will leave the luxuries formerly distributed among one 
hundred to be coiasumed by only ninety-nine families; and this 
diminution of the demand will depress prices and Profits. Then 
the employment of the savings as capital, though it will give 
Wages to more poor families, and will furnish them necessaries 
through their labor, will leave also another margin of Profit, 
which must be devoted, as before, to producing luxuries; and 
thus a larger supply of luxuries will be forced upon the market in 
which but ninety-nine wealthy families are now the only pur- 
chasers. A second depreciation of prices must be the conse- 
quence. . 

The intention of Providence seems to be, that the time and 
labor economized, through the use of machinery and improved 
modes of production, in the production of necessaries, should be 
devoted to the creation of luxuries for very general use, — for 
most of the working families, as well as for a few persons of 
wealth ; or, supposing that there are already luxuries enough for 
all, that the time, the immunity from the necessity of labor, so 
obtained, should be distribiited among the people with some 
approach to equality, nearly all having a portion of leisure 
to devote either to recreation or mental improvement. When the 
distribution, not of wealth indeed, but of the opportunities for 
obtaining wealth, is equalized, or made to approach equality, there 
will be no possibility of creating too many labor-saving machines, 
producing too much, reducing the rate of Profit too low, or glut- 
ting the market of the world. Those whose ambition is limited 
and whose wants are few will not enter into the strife as rival 
producers, but will devote the surplus of time and wealth which 
they have earned to the gratification of their tastes and to a quiet 
enjoyment of life. I have already noticed the fact, that Ireland, 
where the inequality in the distribution of property is extreme, is, 
in proportion to her population and wealth, one of the poorest 



THE THEORY OF GLUTS. 23$ 

markets for manufactured produce in the ■world ; while in th^ 
United States, as there is a near approach to equality in every- 
thing, there is the largest demand for such produce. 

In the business of production, capital — which may be called 
embodied labor, because it consists of the reserved fruits of previ- 
ous industry — must bear a certain proportion to free or immedi- 
ate labor, which is the direct application of human strength and 
skill. Embodied and free labor have each a task to perform ; 
neither can act to advantage unless aided by a due portion of the 
other. The industry of man is of little avail, if it be not assisted 
by tools, implements, and machines. Even the savage cannot 
hunt without his weapons, nor fish without appropriate imple- 
ments. On the other htind, at the opposite extreme of the social 
scale, when machinery exists in its most costly and complicated 
forms, some free labor is still needed to superintend and aid ita 
operation. There may be an excess, as well as ve deficiency, of 
either of the two agencies with which any community performs its 
work. Between such deficiency and excess, the field for the usQ 
of capital varies to every conceivable degree ; and according as 
there is too little or too much capital for the extent of the field, 
the Profits will be large or small. " As surely as there might be 
too many ploughmen," argues Dr. Chalmers, " so there might 
be too many ploughs. What is true of the living is true of the 
inanimate instrument ; both might be unduly multiplied." This 
can be best illustrated by a glance at the successive stages of 
progress of an infant settlement formed by civilized men in a 
country hitherto unoccupied. 

In the infancy of such a colony, the demand for capital ia 
urgent ; the capacities and wants of the settlers far exceed their 
means. The sources of its prosperity as yet are latent, and need 
to be developed. Clearings are to be made in the forests, build- 
ings are to be erected, roads are to be opened, tools to be 
provided. Nearly the whole of the machinery through which an 
organized society does its work is to be created out of the raw 
materials afforded by the land, the sea, and the forest. Lvixurie? 
as yet do not exist. The people are frugal by compulsion; the 
fruits of nearly all their toil, then, become capital, or are converted 
into means for the future more advantageous application of in- 
dustry. The Profits of what little capital they have are also, of 



234 THE FIELD FOE THE USE OF CAPITAL. 

necessity, very great. One tool must be applied to many pur- 
poses, and is therefore constantly in use. The axe for a time 
must do its own work, and that of the hammer, the saw, and the 
plane. The possession of this one instrument must, then, be a 
source of great gain to its owner ; he can buy the unaided services 
of his fellows — the only payment they have to offer — for a 
long time, by the loan of it. In a similar way, eveiy other item 
which constitutes capital in such a community will yield large gains. 

After the privations of the first season are surmounted, each 
laborer probably finds himself provided with tools, so that the 
Profits on this branch of capital are lessened ; and, as an opening 
has been made in the forest, the operations of agriculture can 
begin. There is now a great demand for seed-corn, since the nat- 
ural fertility of the land will return a hundred fold, if the settler 
only has what is requisite for planting. He can safely promise to 
return three bushels of grain in the autumn, for one bushel lent 
to him in the spring ; in other words, he can offer the capitalist a 
profit of two hundred per cent for seed. But after the first 
harvest is gathered in, so bountiful is the product of the virgin 
soil, that very probably grain cannot be sold at all in the infant 
settlement, the supply altogether exceeding the colonists' own 
wants, and the means of transportation and export not being yet 
provided; that is, no Profit can now be made on food till the 
means are obtained for sending it to market. Capital is now re- 
quired to construct roads and furnish shipping; and as the 
commodity is to be carried from a place where it has little or no 
value to one where it wall command a ready sale and a high price, 
the gains of the merchant engaged in this transportation will 
necessarily be immense. For the first few seasons after American 
farmers had established themselves in the Oregon Territory, it is 
an historical fact that they fed their horses wdth the finest wheat, 
no market being within their reach. 

Further illustrations are unnecessary. In respect to many 
other articles, as well as to tools, seed-corn, and means of trans- 
portation, it is easy to see that the wants of an infant settlement 
are great, the Profits of capital are correspondingly large, and 
that, as fast as these wants are supplied, the rate of Profit 
necessarily declines. 

After a country is once sufficiently stocked, as it would seem, 



THE THEORY OF GLUTS. 235 

•with Fixed Capital, the progress of invention may suddenly create 
a new demand for it by calling for the construction of improved 
machines, and implements. Thus the invention of railways, and 
the application of steam to the purposes of land conveyance, have 
occasioned, both in England and America, during the last forty 
yeax-s, an immense demand for the investment of capital, some of 
the old forms in which it was embodied being rendered useless or 
unproductive. Turnpikes cease to be productive propei'ty, and 
canals are less profitable than before. For a time, Floating or Cir- 
culating Capital is in gi-eat request, as it is needed for conversion 
into this form of Fixed Capital ; and accordingly the rate of in- 
terest rises. But when the improvement is completed, this demand 
ceases, the returns from the new processes are very great. Floating 
Capital accumulates more rapidly than ever, and the rate of inter- 
est falls again. The railway improvement in England and in the 
eastern portion of the United States may now be said to be nearly 
completed ; only the lines of communication with the Pacific coast 
still call for additional investment on roads to be traversed by the 
agency of steam. 

But I need not trace further these successive steps in the pro- 
gress of opxdence and the accumulation of capital. It is evident 
that the rapidity of its increase depends on the rate of Profit, which 
is necessarily high in a new country, where the people are frugal 
and industrious. The rate gradually diminishes as the primary 
and most imperative wants of the commiuiity are satisfied, and 
when artificial tastes and an appetite for luxury begin to appear. 
Floating Capital is soon acquired in sufficient quantity for the ordi- 
nary purposes of industry and traffic. In such countries as Eng- 
land and Holland, however, immense sums gradually take the form 
of Fixed Capital, being vested in making land improvements of the 
largest and most expensive character ; in constructing docks, har- 
bors, and canals, erecting dikes, and furnishing manufactories with 
costly machinery. Vast as the field is which such works open for 
the investment of capital, it needs but a glance at the present con- 
dition of England and Holland to satisfy us that this field is all 
occupied, and the work of Fixed Capital is done. What farther 
savings from income are made, must go into the market as Float- 
ing Capital, seeking investment, — seeking borrowers who will take 
it at a very moderate rate of interest. There is great competition 



236 THE FIELD FOR THE USE OF CAPITAL. 

of the lenders with each other in the Enghsh and Dutch markets, 
— a competition which is strikingly shown when the government 
appears as a borrower, and puts up a large loan at what is virtu- 
ally an auction, to be sold in shares to the highest bidder, 

A diminished rate of Profit tends to throw the great branches 
of manufacture and commerce exclusively into the hands of large 
capitalists, and thus to increase that inequality in the distribution 
of wealth which was one of the original causes of a fall of Profits. 
Hence it is, that, in such countries as Holland and England, where 
a, low rate of interest has prevailed for a long period, there is as 
great an inequality of fortune among manufacturers and mer- 
chants as among landowners. "It is in the nature of trade and 
maimfacture," says Mr. Laing, " that great capital drives small 
capital out of the field ; it can afford to work for smaller returns. 
There is a natural tendency in trade to monopoly, by the accumu' 
lation of great wealth in a few hands. It is not impossible, that, 
in every branch of trade and manufacture in Great Britain, the 
great capitalist will, in time, entirely occupy the field, and put 
down small capitalists in the same line of business ; that a mon- 
eyed aristocracy, similar to that in Genoa, will gradually be formed, 
the middle class of small capitalists in trade and manufacture be- 
come gradually extinguished, and a structure of society gradually 
arise in which lords and laborers will be the only classes or grada- 
tions in the commercial and manufacturing, as in the landed, 
system. An approximation, a tendency, towards this state is 
going on in England. In many branches of industry — for in- 
stance, in glass-making, iron-founding, soap-making, cotton-spin- 
ning — the great capitalists engaged in them have, by the natural 
effect of working with great capital, driven small capitals out of 
the field, and formed a kind of exclusive famil}^ property of some 
of these branches of manufacture. Government, by excessive 
taxation and excise reg-ulation, — both of which have ultimately 
the effect of giving a monopoly to the great capitalist, who can 
afford the delay and advance ofw.oney these impediments require, — 
■has been hitherto aiding, rather than counteracting, this tendency 
of great capital to swallow all the employments in which small 
capital can act." 

I shall soon have occasion to show, that it is the abundance 
of Floating Capital seeking investment, the competition of 



THE THEORY AND USES OF MONEY. 237 

lenders with each othex', and the consequent depression of the 
rate of interest, that is the great incentive to those wild and 
ruinous speculations which usually precede a commercial crisis, 
and are commonly, though improperly, attributed to some defec- 
tive regulation of the cm'rency. But my present point is suffi- 
ciently illustrated, which is, that when a sufficient amount of 
wealth has taken the form of Fixed Capital to satisfy all the 
real wants of the country, — that is, when the whole organism of 
agricultural, manufacturing, and commercial industry is completed, 
— then, if savings from inc(Jme continue to be made, they must 
be pushed into market as Circulating Capital seeking investment ; 
and the rate of Profits and interest must sink to a minimum from 
the competition which then ensues. This is already the state of 
affiiirs in England ; and if we are still distant from it in the 
Atlantic States, it is because the new settlements which are con- 
stantly forming in the West operate as a drain upon our capital 
as well as our population ; and also because the field open for the 
investment of Fixed Capital in the gigantic improvements required 
in our immense territory is so vast that centuries must elapse 
before it is fully occupied. 



CHAPTER XII. 

THE THEORY AND USES OF MONEY, AS ILLUSTRATED BY INCIDENTS IN 
THE WAR OF THE GREAT REBELLION. 

There are three things which are so frequently confounded with 
each other, that I begin with an attempt to define them and ascer- 
tain their precise meaning. These are Money, Currency, and 
Floating Capital. 

1. Money, in the strictest sense of the term, consists of stamped 
pieces of the precious metals, of a known weight and fineness, 
issued by government authority, adopted both by that authority 
and by common consent as the common medium of payment and 
exchange, and having a natural or intrinsic value equal, or nearly 
equal, to the value thus attributed to them by authority and use. 
In other words, Money is what we usually call Specie. 



238 THE THEORY AND USES OF MONEY. 

As Money, it is not a commodity, or an article of common pur- 
chase and sale ; but it may readily be converted into a commodity 
at the wish of its holders, either through melting it up, or through 
selling it, in proportion to its weight and fineness, as so much bul- 
lion. On account of its intrinsic value and consequent universal 
acceptahleness, it is not merely a legal, but a natural tender for 
the payment of debts. 

As Money, moreover, it has two perfectly distinct functions : — 
1. As a standard or measure of value ; and, 2. As a universal me- 
dium of exchange. 

It is not a perfect standard, but it is the nearest approach to 
one, and the most convenient or available for use, that can be 
had. By common consent of all nations, the two precious met- 
als, as they are called, have been selected, one or both, as the 
unit of measurement, or nearest practicable approach to a standard 
of value, because their Cost of Production has been more stable 
and uniform than that of any other commodity. They are ob- 
tained in small quantities, by nearly the same amount of labor in 
different years, in various parts of the world ; and as the stock 
of them already on hand, accumulated by the labor of many 
previous years, is large, while the addition to this stock obtained 
in any one year is relatively very small, their value necessarily 
changes slowly, if at all. By law, the dollar contains 23.2 grains 
of pure gold, or 345.6 grains of pure silver; the values of the two 
metals, of course, are in the inverse ratio of these quantities, or 
as about 14.9 to 1. The English pound sterling, or sovereign, 
contains a small fraction over 113 grains of pure gold ; the French 
franc contains 4.484 grains. As the real unit of value is one 
grain of pure gold, it is evident that the pound sterling is worth 
4.87 dollars, or 25.2 francs. In other words, 113 grains of pure 
gold are coined in England into one pound sterling ; in France, 
into 25.2 francs ; in this country, into 4.87 dollars. 

As a means of ascertaining the relative value of different com- 
modities, money is akin to the yardstick or the peck basket. As 
the former is a measure of length, and the latter of capacity, so 
the dollar or the pound sterling is a measure of value. Great 
pains have been taken to determine with the utmost exactness the 
dimensions of the two former measures ; otherwise, all contracts 
for the delivery of a quantity of cloth, grain, or any other com- 



THE THEORY AND USES OF MONEY, 239 

modity would be so indetermiuate as to give rise to endless 
disputes ; in fact, their precise execution would be impossible. 
Far more important is it that the dollar, or the franc, which is 
the unit for measuring values, should itself be determinate 
and unalterable in its value. All bargains in trade, all mer- 
cantile or financial contracts to be executed at a future day, 
depend upon precise determinations of the values involved. As 
there could be no interchange of thought between man and man, 
if the words in the language used did not have their fixed mean- 
ings, known to all ; so there could be no proper traffic, no satisfac- 
tory fulfilment of contracts, no precise determination of profit or 
loss, except the values in question could be easily ascertained by 
precise measurement. As a measure of value, then, money is an 
indispensable agent of commerce, and without it civilization itself 
would be impossible. All substitutes for it, all modes of econo- 
mizing or facilitating its use, are legitimate and equitable only so 
far as they preserve its essential attributes of precision and un- 
changeableuess. The Price of any commodity is its value reck- 
oned in Money ; and hence, as the unit of measurement. Money 
may be called the universal regulator of Prices. Thus, as the 
value of Money (i. e. of one grain of pure gold) rises, the Prices of 
all commodities fall in the same ratio ; and vice versa, as the 
Money falls, the Prices rise. In fact, the word Price means value 
measured by Money. 

In its second function, Money is a convenient, though not an 
indispensable, medium of exchange. Trade is really an interchange 
of commodities; we part with one commodity, or one parcel of 
commodities, only in order to obtain other commodities in ex- 
change. But as it is often inconvenient to effect the desired ex- 
change directly, we perform it indirectly, first selling for Money 
the articles that we wish to get rid of, and then purchasing with 
this Money the articles that we desire. This appears to be a need- 
less complication of the process, as it is really making two ex- 
changes, when but one would seem to he necessary. But we are 
compelled thus to act, because we can seldom find a person who 
not only wishes to buy the very commodity, and the exact quantity 
of it, which we wish to dispose of, but who also desires to sell the 
very articles, and the same quantity of them, which we need to 
obtain. Most frequently, therefore, we are obliged to sell to one 



240 THE THEOEY AND USES OF MONEY. 

person, and to bny from another. Hence there needs to be some 
common medium of payment and exchange, — some embodiment 
of vakie, which we can safely receive in exchange for the com- 
modity that we part with, because we know it will be received 
from us, and at the same valuation at which we obtained it, in pay- 
ment for whatever we wish to purchase. Money is such a common 
medium, and a very convenient one, because it is so divided into 
coins of different weight and value that we can easily make up 
from it the precise sum needed to adjust the payment or sale. 

The essential qualities of a common medium of exchange are, — 
1. Fixity of value ; 2. Universal acceptableness j and, 3. Divisibility 
into parts of such size as to furnish an exact equivalent of any re- 
quired amount. No one desires Money for its own sake, but only 
for the sake of what it will purchase. No one will consent to re- 
ceive it, then, if he is not sure that it will not lose value while in 
his hands, and that anybody else will gladly receive it from him 
in exchange for any commodity that he desires. 

I have said that Money, though convenient, is not indispensable 
as a medium of exchange. Practically, as we shall see hereafter, 
in the complex operations of trade, purchases are frequently offset 
against sales, so that the transactions are completed without any 
actual use of Money. This is the case generally in wholesale 
trade, and especially in the large transactions of international com- 
merce, since it would be inconvenient and hazardous to transport 
large sums of Money over a great distance, and across sea. 

But though such offsets actually reduce trade to direct barter of 
one set of commodities for another, they cannot be effected without 
a precise determination of the values which are thus interchanged; 
and such determination is possible only through reference to 
Money in the exercise of its first function, as an accurate measure 
of value. A tradesman may be willing to barter tea. sugar, and 
other groceries for grain and meat ; but the two parties to such a 
trade can agree upon its terms only through a precise measurement, 
in dollars and cents, of the relative values of the articles which are 
exchanged for each other. A tradesman cannot safely conduct his 
business except by keeping accounts ; and book-keeping is practi- 
cable only through computation and measurement of the values 
bought and sold. Hence, by the common metonymy of substitut- 
ing the measure for the thing measured, we generally speak of 



THE THEORY AND USES OF MONEY. 241 

capital, property, merchandise owned, loans, payments, etc. as so 
much Money, — as so many dollars or pounds sterling ; though, 
in fact, gold or silver coins form little or no portion of them, but 
they are only so many dollars^ worth. 

Moreover, since Money is the common medium of exchange, 
and since wealth itself subsists, or is continued in existence, only 
through an interminable series of exchanges, all w^ealth must more 
or less frequently, though only for a short time, appear as Money, 
and be reckoned or estimated as such. Money is thus the imiver- 
sal form or garb which all the items or commodities that constitute 
wealth occasionalh' assume. If a man is compelled to borrow, he 
borrows, not the particular articles that he actually needs, bat as 
much Money as will enable him to purchase them. And when he 
pays the debt, he does not return the very articles that he bor- 
rowed, or an equivalent amount of a similar kind, but he pays a 
proportionate sum of Money. As we are thus obliged constantly 
to substitute one name for the other, it is not strange that people 
should almost universally believe that Money alone is wealth, and 
that the ease or difficulty of effecting loans and payments should 
be called " the abundance or scarcity of Money." This error can 
be avoided only by keeping constantly in view the fact that Money 
has two distinct functions, and only two : First, as a measure of 
value, — that is, of wealth, capital, debt, or payment, — it is akin 
to the yardstick or peck basket ; secondly, as a medium of exchange, 
it is a mere " ticket of transfer," or means of effecting a change of 
ownership, — that is, of bartering one kind of merchandise for 
another. 

2. Currency, as its name imports, is the current substitute for 
money, and has no intrinsic value. It consists of engraved pieces 
of paper, issued either by the government or by a bank, each bear- 
ing on its face a promise to pay the bearer, either on demand or 
at some future day, a certain sum of Money. Strictly speaking, 
then, it is the acknowledgment of a debt, and it differs from other 
acknowledgments of indebtedness, such as promissory notes, bills 
of exchange, and the like, only because it is payable " to bearer," 
whoever this may be, and not, like the promissory note, or bill, 
" to order " of some one person. Because it is thus left indeter- 
minate, so that any holder of it may demand its payment, it is 
fitted for general circulation as a substitute for Money. A note 
16 



242 THE THEORY AND USES OF MONEY. 

of hand is not fitted for such use, because payment of it can be 
enforced only by the particular person designated on its face, or 
by his legally accredited representative. 

Currency is of two sorts, — 1. That which is immediately 
convertible, or payable on demand; 2. That of which the pay- 
ment is postponed, either indefinitely, or to some fixed future day. 
The former usually appears as convertible bank-currency, or bank- 
bills ; the latter is properly called Paper Money. 

If the arrangements made by the issuing banks are such that 
every holder of their bills is sure that he can have them cashed 
with ease and quickness whenever he desires, then the bank-bills 
are an admirable substitute for Money. That which is immedi- 
ately convertible into a dollar or a pound sterling will evidently 
measure value just as well as that dollar or pound ; a piece of tape 
or paper, if it is just a yard long, is as good a measure as the 
yardstick. As a medium of exchange, such bank-bills are not 
merely as good as Money; they are better, for they are more 
convenient. They are less expensive, more portable, more easily 
counted, and, if lost by accident, wreck, or fire, there is no abso- 
lute destruction of value, — no real loss to the community. Only 
make smre of their immediate convertibility, and there is a great 
gain in substituting, as far as possible, bank-bills for actual 
Money. 

But Paper Money, because it is not immediately convertible, 
has no fixity of value, and is therefore adopted only on compul- 
sion, through the act of the government or the necessity of the 
case, which, by making it legal tender, compels creditors to receive 
it as a satisfaction of their dues. Foreigners are under no 
obligation to receive it, and therefore invariably refuse it, so that 
its circulation is confined to the country in which it originates. 
Its value there, at any one time, depends not merely upon the 
actual quantity of it in circulation, but on the apprehended speedy 
increase or diminution of that quantity, according as the necessi- 
ties or the caprice of the government, or other authority by which 
it is issued, may dictate. Hence its value cannot be rendered 
stable or uniform ; it is always liable to sudden, and even great, 
fluctuations in value, according as the apprehensions of the 
people are more or less excited. The value of the Money in use 
is, as we have seen, only another name for the prices of commodi- 



THE THEORY AND USES OF MONEY. 243 

ties. Accordingly, when Paper Money is in use, there is no 
standard — no uniformity — of prices, and therefore no possibility 
of foreseeing how much value must be given and received in 
payment of a debt or in the execution of a contract. The very 
life of trade consists in anticipating what will be the prices of 
merchandise at some future day ; if this cannot be done, legiti- 
mate trade cannot go on ; it is reduced to mere gambling. Any 
one who buys or sells for any other purpose than that of immedi- 
ate consumption must, in popular phrase, "run for luck"; he 
cannot tell whether he will gain or lose by the transaction. 
Commerce is thus incapacitated for performing its proper functions 
of equalizing the supplies and the prices of commodities at 
different times and at different places. 

What is worse, the use of Paper Money destroys confidence 
between man and man ; it sanctions injustice, and compels the 
injustice to be constantly repeated. Any one who trusts another, 
either by selling him goods on credit or by making him a loan^ 
does so at his peril. He must " run for luck " ; for he cannot tell 
how much less or more value there may be in the nominal pay- 
ment than there was originally trusted out. If, in the interval 
between contracting and paying a debt, the value of the Paper 
dollar is depreciated 20 per cent, the creditor is defrauded of one 
fifth of his just due ; if that value rises 20 per cent, the debtor is 
compelled to pay one fifth more than he ought. On account of 
the uncertainty and injustice thus created, legitimate trade in this 
country, during the last eight years, has been several times 
reduced almost entirely to what is called " a cash basis " ; that is, 
credit has been generally refused, and the only proper traffic has 
been the direct interchange of values vested in commodities. 

The value of Paper Money does not at all depend upon the 
probability that the " promise to pay," which is engraved upon its 
face, will be kept. Its issue is an act of enforced bankruptcy ; it 
acquires a conventional but fluctuating value from the legal 
necessity imposed upon all creditors to accept it as a full discharge 
of any pecuniary obligation. The act of government has made the 
notes legal tender- ; and the power which they thus possess to wipe 
off debts gives them a fictitious value, or makes them capable of 
effecting purchases. Everybody is willing to take these poor 
substitutes for money, because everybody else is willing, or is 



244 THE THEOEY AND USES OF MONEY. 

Compelled, to take them. If any one has a barrel of flour to sell, 
it may seem that he makes a foolish bargain by consenting to 
exchange it for half a dozen ragged bits of paper, each bearing a 
promise which, as he well knows, will never be redeemed. But 
observe that the real equivalent for the flour is not these worth- 
less notes themselves, but the commodity which they will pur- 
chase, or the act which they will enable him to perform. He sells 
the flour because he wishes to buy a piece of cloth, or some 
groceries, or to pay off a debt; and if these bits of paper 
will enable him to accomplish these ends, — to buy the desired 
commodities or a receipt in full, — they are just as valuable as if 
they were Money strictly so called, as if they had intrinsic 
value. 

Recent facts confirm this theory. During the last year of the 
Great Rebellion, probably not the most sangiiine Confederates had 
any expectation that the Paper Money with which their govern- 
ment had deluged the Southern States would ever be redeemed or 
paid off, either in full or in part. It was already so depreciated 
that forty or fifty dollars of it were needed to buy one dollar in 
gold. But at this depreciated rate it circulated just as freely as 
ever, — probably more freely, as the depreciation went on ; since 
every one who had received it was eager to get rid of it, or to pay 
it away as fast as possible. It was quite as easy in Richmond, up 
to the date of its evacuation, to buy a barrel of flour with three 
hundred dollars in Confederate Currency, as with six dollars in 
gold ; — not that any sane person regarded these two sums as 
equivalent in intrinsic value, but because the state of the market, 
and the necessity of having some common medium of exchange, 
some Currency or other, had established this relation between 
them. 

The paradox seems still more extravagant when we state, that 
the want of faith in the " promise to pay," or the opinion which 
may be entertained respecting the probability of the notes being 
redeemed at some future day more or less remote, is not the cause 
even of the depreciation in the value of the Paper Money. The 
extent of the depreciation depends not at all on the presence or 
the want of faith in the ability and disposition of the government 
to pay off the notes in full with specie, or on the nearness or re- 
.inoteness of the time wlien it is likely to do so ; but solely on the 



THE THEORY AND USES OF MONEY. 245 

relative amount of the Currency as compared with the needs of 
business. 

How great are these needs 1 Commerce needs Money or Cur- 
rency enough to enable it to perform its peculiar function ; that 
is, to make the prices of commodities in the home market equal, 
or as nearly equal as possible, to the prices of the same com- 
modities in foreign markets. If the amount of Paper Money is 
just sufficient for this purpose, there is no need of its being 
redeemed at all, but it may continue in use for an indefinite 
period. A paper dollar is just as good as a gold dollar, so long as 
it will buy as much ; that is, so long as prices are maintained 
at the point of equilibrium. If there is more than enough Paper 
Money for tliis end, it will inevitably be depreciated ; that is, 
prices will be unduly enhanced. And the depreciation, or the 
undue enhancement of prices, — these two phrases meaning pre- 
cisely the same thing, — wiU be strictly proportioned to the 
excess of the Currency, or to what men think will very soon be 
the measure of that excess. 

For instance : if there are only one hundred dollars to buy 
flour with, and only ten barrels of flour are offered for sale, the 
competition of buyers and sellers must fix the price at ten dollars 
a barrel. If there were twice as much flour, the number of dollars 
being the same, the price must be reduced to five dollars. On the 
other hand, double the quantity of money, — let there be two 
hundred dollars available for this purpose, — and, as at first, only 
ten barrels to be sold, and the price would rise to twenty dollars 
a barrel ; that is, each doUar would be worth only half as much, 
— would be depreciated fifty per cent. Such an adjustment of 
prices is evidently independent of any opinion that may be enter- 
tained respecting the intrinsic value of the dollar, or the proba- 
bility of its speedy redemption in coin. Money as such is valuable 
for no other purpose than buying commodities or paying debts ; 
and therefore its value must be measured by what it will accom- 
plish in these two respects. 

3. Floating Capital is the only stock of values which are really 
available for actual loans or actual payments. Its amount, at any 
one time, is the aggregate of merchandise of all sorts which is 
directly offered for sale in open market and at current prices. It 
includes even lands, buildings, machinery, railroads, and all other 



246 THE THEORY AND USES OF MONEY. 

income-yielding works and improvements ; but includes these or 
any other goods so far onli/ as they are actually put into the market 
at ordinary rates, and not reserved for the owner's private use, 
occupation, or enjoyment, or for sale at some future day. It is 
the accumulated surplus product of the national industry which 
remains after each producer or owner has taken out of his share 
of it what he needs for his own maintenance and consumption, and 
what he holds over for future use or sale. It exists in myriad 
forms, so as to satisfy all tastes and provide for all wants 
and emergencies ; and the greater part of it is in constant 
use as a means of helping industry and thereby increasing the 
annual product. It is the great national " stock in trade," per- 
petually changing ownership as well as form, and perpetually 
offered for sale, loan, and payment. The incessant transfer of 
portions of it from one person to another, — portions always 
definite in respect to the amount of value transferred, but usually 
left wholly indeterminate in respect to the particular articles in 
which that value is embodied, — is the operation in which all debt 
originates, and through which that debt is finally paid. Indeed, 
most of the Floating Capital of every country is constantly subject 
to indebtedness, because the nominal owners of the larger portion 
of it are not its real owners, but have borrowed from others the 
whole or a part of its value. 

Moreover, since the merchandise often changes hands more 
frequently than the debts mature which are created at each trans- 
fer, the aggregate of debt often largely exceeds the amount of 
property which is its source and representative. Thus, a mer- 
chant, A, may sell 100 bales of cotton to B on six months' credit ; 
long before this debt becomes payable, B may sell the cotton 
on equal length of credit to C, C to D, and so on indefi- 
nitely. Thus, though the value at each sale be only $50,000, 
before the first six months have elapsed, debts may have 
been incurred and promissory notes passed, based on this cotton, 
amounting to half a million of dollars. These debts, moreover, 
being transferable, are sold hardly less frequently than the mer- 
chandise in which they originate. In order to pay his debt to A, 
B relies on payment from C ; but as C's note, given at a later day, 
does not mature soon enough for this purpose, B sells it, perhaps, 
to a broker, who again sells it to a bank, and B is thereby enabled 



THE THEORY AND USES OF MONEY. 247 

to anticipate its payment. Trace this line of sale and transfer as 
far as we may, it all forms one chain ; and the hook to which the 
first link of the chain is attached is the 100 bales of cotton, which 
form one item in the vast aggregate of our national Floating 
Capital. All debt comes originally, then, from a change of own- 
ership, or rather from a change of possession, of some portion of 
this Capital ; since not the actual holder of the cotton, but he who 
last bought up the debt created by its sale, is its real owner. All 
the intermediate parties to the transaction, through soon reselling 
the cotton or the debt, have been already repaid all that they 
advanced. 

As all debt originates in this fund, so all payment which is real 
payment, and not a mere transfer of one debt for another, must 
come out of the same fund ; in other words, the payment, as well 
as the original loan, is in merchandise. Thus, a miller who 
receives $ 10,000 for a lot of flour is really paid in the wheat 
which he immediately purchases with those dollars. A manufac- 
tiu'er of boots and shoes is paid in leather ; a paper-maker, in rags. 
The only advantage of using Currency or Money in payment of a 
debt is, that it enables the creditor to select for himself the articles 
in which he prefers to be reimbursed. Perhaps he will take some 
of one and some of another kind of Floating Capital ; or he may 
wish to be paid by a little invoice or assortment of commodities. 
A workman's wages are really paid, every Saturday night, in a lit- 
tle stock of necessaries. The gi-eat fund of Floating Capital in the 
country furnishes the values which were originally lent, and those 
which are finally paid. 

I have thus, at length and with some minuteness, endeavored to 
define and analyze the distinctive nature and functions of Money, 
Currency, and Floating Capital, because, in the common use of 
language, and in all the ordinary transactions of trade and finance, 
these three very different things are usually confounded and 
loosely lumped together under the one name of Money. This 
misuse of language, and the confusion of ideas which lies at the 
bottom of it, is the source of all the popular errors on the subject, 
the cause of the paradoxical appearance of most of the statements 
in which the true theory of finance is summed up, and the origin 
of the numerous and serious mistakes committed in legislation 
about banks and the Currency, and in the financial operations of 



248 THE THEOEY AND USES OF MONEY. 

governments. Some of these paradoxes may be here briefly 
stated. 

1. Money is a mere convenience, and, in performing its function 
as a medium of exchange, need not, and generally does not, possess 
any intrinsic value whatever, — any more than the bit of paste- 
board, called a railroad ticket, which entitles one to a seat in the 
cars. 

2. Money yields no profit and bears no interest; profit can 
accrue only from the use, interest only from the loan, of Capital. 
To retain in one's possession a large sum of Money is not, either 
for an individual or a community, a means of becoming rich, or 
even a means of direct enjoyment ; but it is an expense and a loss, 
corresponding to the unproductive accumulation of fine clothes and 
costly furniture for the mere purpose of ostentation. 

3. No sensible person wishes to obtain Money in order to keep 
it, but only to pay it away to others ; and the sole reason why he 
will receive it at all is, that everybody else is willing to take it, 
and is also in just as great a hurry as he is to get rid of it 
as soon as possible. 

4. In any country, the population and the commercial and manu- 
facturing industry remaining the same, the stock of Money, meas- 
ured by its value relative to that of other commodities, cannot be 
increased. Pour in more, — double or triple the quantity, — and 
either the additional quantity will not stay in the country, but wUl 
escape from it as readily as water does from a sieve, or the power 
of each individual piece of Money will be thereby so much dimin- 
ished, that the aggregate value will be no greater than it was be- 
fore such increase. 

5. Even in performing its function as a measure of value, the 
greater or less quantity of Money is a point of no importance. If 
gold were but one fourth as plentiful as it is now, one grain of it 
would be quadrupled in value, but would still measure other val- 
ues as accurately as ever. The unit of measurement would then 
represent a value four times as large as before ; our measure would 
be the bushel, instead of the peck. Just the opposite effect would 
be produced, if the quantity of gold should be increased fourfold ; 
we should then be using a two-quart measure, gold having but a 
fourth part of its former value. 

6. To increase the stock of Money in the country is not thereby 



THE THEOKY AND USES OF MONEY, 249 

to augment the fund available for loans, or to diminish the diffi- 
culty of borrowing, or to lower the rate of interest. On the con- 
trary, the difficulty of borrowing is enhanced by any considerable 
enlargement of the stock of Money. Hence, the phenomena of 
what is usually called " a tight money-market " are not in any way 
attributable to a scarcity of Money, nor is " an easy money-market " 
caused by an abundance of the circulating medium. And the rate 
of interest is so far from being lowered by the abundance of Money, 
that it is usually highest when Money is most plentiful, and de- 
clines as the latter becomes scarce. In California, for instance, at 
the time when they were digging Money out of the ground at the 
rate of three millions of dollars a week, and were exporting it at 
the rate of one hundred and fifty millions a year, because they had 
more than they knew what to do with, the ordinary rate of inter- 
est was from 24 to 36 per cent. And even now, California still 
continuing to export Money, though at a diminished rate, the nor- 
mal rate of interest there is about double what it is in the Atlan- 
tic States. 

7. We do not really borrow Money, nor do w^e pay Money, either 
in cancelling debts or in purchasing commodities. What we bor- 
row has actual value, and we need to keep it for six months, or a 
year, or whatever the period of the loan may be. But Currency, 
which answers all the purposes of Mone}', has no intrinsic value, 
and the borrower certainly does not keep it on hand, but pays it 
away forthwith, — usually on the day on which he obtains it. 
He would not borrow at all, if he had not occasion for such imme- 
diate payment. Of course, the interest, which is the compensa- 
tion paid for the loan, is not paid for the use of the Money, but 
for the use of the actual values — that is, the commodities — 
which are transfen-ed to the borrower on presentation of the Money 
or Currency as a certificate to prove that these commodities have 
been really loaned to him for a season. Just so is it in the case of 
pm-chases and payments. The receiver would not consent to take 
that which has no value, either in satisfaction of a real debt or in 
return for the deliver}^ of valuable goods. He takes the Money for 
the hour only, as a certificate entitling him to receive immediately 
a corresponding portion of the Floating Capital in the country, 
which is the value that is actually paid to him. 

These paradoxes might be multiplied indefinitely ; but the 



250 THE THEORY AND USES OF MONEY. 

specimens now given will suffice. They are all resolved, and their 
paradoxical character disappears as soon as we perceive that Cur- 
rency, or Floating Capital, is really meant in most cases when we 
are loosely talking of Money. Since Currency has no intrinsic 
value, and even Money does not need to have any, in order to be 
generally acceptable, it is not strange that Money bears no interest, 
or, in other words, that people should not be willing to pay any- 
thing for the use of it ; that no sensible person wishes to keep it, 
even for a single day ; that the quantity of it in a country cannot 
be inci'eased, for there is a limit within which only is it generally 
acceptable, — just as no more railroad tickets can be sold than 
there are seats or places in the cars to be obtained by them. 
Again, since Floating Capital, in some of its myriad forms, is really 
the commodity which is wanted, which is borrowed and paid, inter- 
est being the compensation for its use, it is not strange that to 
bring more Money into the country does not at all enlarge the 
fund available for loans, or diminish the difficulty of borrowing, or 
lower the rate of interest. 

This truth cannot be better illustrated than by the experience 
of this coimtry during the recent war ; and it was ignorance of 
this truth, or losing sight of it, which led to nearly all the finan- 
cial mistakes of the war. Most persons thought, at the outbreak 
of the Rebellion, or at least as soon as its magnitude and the diffi- 
culty of overcoming it were fully recognized, that the great want 
of our government would be the lack, not of men, but of Money. 
This must have been the opinion of the Secretary of the Treasury 
and of Congress, since their chief financial measures looked to this 
end alone. How were we to obtain the Money, — how effect the 
enormous loans that were necessar}^ to place and sustain immense 
armies in the field, and to bring out all the machinery of war on a 
larger scale than the world had ever witnessed 1 The patriotic en- 
thusiasm of the people supplied soldiers and sailors enough ; there 
was never any real doubt that we could fill our army, and man our 
navy, to any extent that might be requisite. Just as little did any 
one doubt that the industrial and commercial ability and energy 
of the country could furnish all the arms and munitions, all the 
ships and provisions, all the transportation and supplies, which a 
million of men in arms would need, provided only that these arti- 
cles could be paid for, or that Money could be obtained wherewith 



THE THEOEY AND USES OF MONEY. 251 

to purchase them. Looking at the problem in this light, it is not 
sui'prising that the two great financial blunders of the war should 
have been committed ; namely, that more Currency was issued for 
the Northern States alone than had formerly sufficed for the 
whole country, North and South, and the National Banking sys- 
tem was established. 

The means adopted by the government to supply this fancied 
" want of Money " were to issue Currency enough to make the 
circulating medium thrice as large as it was before, thereby en- 
hancing the price of all commodities threefold against itself, and 
also, under the plea that it was necessary to have a national 
Currency, to establish the National Banks. The expectation was, 
that Money would by these means be rendered more plentiful, so 
that there would be enough, to adopt the common phrase, to 
" float " the heavy loans which the government was obliged to 
raise, and to enable the people to bear the heavy taxation which 
had become necessary. But it is easy to prove that the " want of 
Money " was not the real difficulty which the government had to 
contend with, even in the darkest days of the war ; and that an 
increase in the stock of Currency, or even of Money properly so 
called, if that had been possible, would not have lessened, but 
would have greatly augmented, the wants of the Treasury. 

War is certainly not carried on with Money. We do not 
consume or use up gold and silver, while waging hostilities ; and 
a large issue of bits of paper, inscribed with a " promise to pay " 
which no one believed would be kept till after the close of the 
war, was not a likely mode of helping the coxmtry out of its diffi- 
culties. What was actually needed for the purposes of the war 
was, first, the services of about one million of men in the field, — 
say, one fifth of the whole working population of the North. Of 
course, the remaining four fifths would be obliged to do the work, 
or as much of it as they could, originally performed by the whole 
number. They had to feed, clothe, and shelter, not only them- 
selves, but one million of soldiers, sailors, and officers, who were 
diverted from the lucrative pursuits of general industry to the 
unprofitable occupations of war. Still farther, the country, in 
these its four years of great trial, besides the direct services of this 
vast number of men, needed six hundred and fifty ships of war, of 
all sizes and patterns. It needed at least two millions of riflea 



252 THE THEOKY AND USES OF MONEY. 

and other small arras, about three thousand field, siege, and sea- 
coast cannon, varying in dimensions and cost, and perhaps a 
million of horses and mules to mount the cavalry, drag the artil- 
lery, and transport the baggage and stores of our vast armies. It 
needed gunpowder, shot, shell, cartridges, harnesses, tents, and 
accoutrements, in quantities which one would vainly attempt to 
estimate. A mere catalogue of the miscellaneous articles forming 
the minor supplies of war waged on this enormous scale would fill 
a volume. In truth, it would be difficult to mention an article 
which the government, sooner or later, in large or small quantities, 
did not have occasion to obtain and consume in the war, except 
Money, which, for all purposes of offence and defence, would 
certainly have been as useless to the cause as it was to Alexander 
Selkirk. There was an immense consumption of the articles 
enumerated, but no consumption of Money. Except an insignifi- 
cant amount lost by fire, wreck, and other casualties, everj dollar, 
whether of real Money or Paper Currency, which was in the 
country at the beginning of the conflict, or was created during its 
progress, remained in existence at its close, and with all its essen- 
tial properties unimpaired. 

In the last analysis, the only requisite for carrying on war, or 
for conducting any other enterprise whatsoever, is human labor. 
Besides the direct services of one million of men in the field, the 
four years' labor of at least another million, another fifth of the 
entire working population of the North, was consumed in pro- 
ducing the ships, artillery, and other munitions with which the 
great contest was carried on. Two fifths of the people were thus 
withdrawn from their ordinary avocations to give their whole time 
and industry to the exigencies of the war. The task of the 
remaining three fifths, as already remarked, was not only to 
maintain themselves, but to support these two millions and their 
families, and, in addition, to divide with them equitably their ordi- 
nary surplus earnings, or what they were accustomed to gain over 
and above the necessary expenses of living. And this task, great 
and burdensome as it appears, they accomplished. The whole 
people, including the army and navy, were fed, clothed, and sup- 
ported during the four years of strife, not without some privation 
and hardship to a portion of them, but nearly at their usual rate 
of comfort, without incurring any foreign debt. Though a por- 



THE THEORY AND USES OF MONEY. 253 

tion, comparatively a small one, of the national debt was sold in 
Europe during the war, or soon after its close, it was thus disposed 
of, not by the government, but by private owners, and not from 
necessity, but choice, because German and Dutch capitalists were 
willing to give more for it than it was worth at home. 

It is certain, then, that the whole cost of the war, enormous as 
it was, was defrayed out of the siirplus earnings of the people, the 
net product of the national industry, during the four years of 
conflict. Besides furnishing all the men for the army and navy, 
the Northern States produced all the war material, all the muni- 
tions and supplies, thi'ough the industry of those years alone, 
leaving the accumulation of Capital in the country intact, or just 
as large as ever. Of course, the country availed itself, as in for- 
mer years, of the conveniences of exchange with foreign nations. 
A portion of the supplies, some of the raw material which the 
American soil is not fitted to produce, and even some of the manu- 
factured goods which could be more cheaply made elsewhere, were 
purchased abroad. But these were paid for out of our other sur- 
. plus products, by American wheat, petroleum, lumber, native gold 
and silver, and manufactured goods. All was produced or paid for 
out of the surplus earnings of the time, leaving the stock of Capital 
in the country unimpaired, and most probably increased. 

It follows, as the lesson specially applicable to the present sub- 
ject, that the whole cost of this war to the North might have been 
defrayed immediately, leaving no debt behind, and ivithout any use 
of Money, by a direct tax in kind. It was only necessary to appro- 
priate by law to national purposes two fifths of the labor of every 
working person, and two fifths of the production of all the Fixed 
Capital, in the Northern States. In so doing, the government 
would have taken two fifths of the working people by conscription, 
and obliged them to devote their whole industry to the public 
cause ; and it would have paid them in kind, — that is, in food, 
clothes, and other necessaries, • — not the eqxiivalent of their ordi- 
nai'y wages, but only three fifths of such wages, the remainder be- 
ing defrayed by taking two fifths of all the products raised or 
manufactured by the labor of those who continued to work in their 
old way. 

It was not deemed advisable — it would have been very im- 
politic — to meet the whole drain of the war in this manner, which 



254 THE THEORY AND USES OF MONEY. 

is precisely the mode adopted by barbarous or half-civilized tribes. 
Tell most persons that they must immediately, and every day, for 
four years, give two fifths of their time and best efforts to some 
great public cause, which, however high and important, yields them 
no present return, and have only the remaining three fifths of their 
time to work for themselves, and they will become so dispirited 
that their labor will cease to be efficient ; it will be of little worth, 
either to themselves or the public. But offer a compromise, which 
will enable them to throw a great part of the burden upon the fu- 
ture, and to distribute it equally over a long series of years, even 
at the cost of paying heavy interest for such postponement, and 
they will gladly accept the proposal, if the exigency, in their view, 
demands such a sacrifice. This was the course which the govern- 
ment adopted. The owners of the Floating Capital, from the 
mechanic who had laid by a few hundreds from his earnings up to 
the millionnaire capitalist, agreed to advance full wages to the two 
millions who were to labor exclusively for the war, and to allow 
the other three millions of workers still to command the full fruits 
of their own industry, on condition that the whole people would 
repay them, principal and interest, in the way of an annual tax on 
industry for many years to come. This advance, to recur to the 
principles already stated, was not of Money, but of Floating Cap- 
ital ; it was not so many dollars (for there were not 3,000 millions 
of dollars, nor anything like it, in the country during the war- 
period) ; but it was so many dollars' worth of commodities and 
merchandise, which alone possess intrinsic value or capacity to 
satisfy human wants. 

Leaving here the discussion of the general theory of the subject, 
we go back to consider more particularly the nature and uses of 
real Money, that is, of gold and silver coin. Money is merely a 
contrivance for measuring values and diminishing the friction of 
exchange ; and though a safe and convenient, it is also a very costly, 
contrivance for this end. It is absolutely unproductive except for 
this purpose ; it is a portion of the wealth of the country, it is 
true ; but it is a portion of our unproductive wealth, not of our 
capital. We are the poorer by the loss of profit or interest on aU 
of it which we are obliged to keep on hand. And even as an arti- 
cle of unproductive wealth, it may be said of Money that it grati- 
fies no taste, and, in its capacity as Money, apart from its character 



THE THEOKY AND USES OF MONEY. 255 

as a portion of wealth, it yields no enjoyment. Properly speaking, 
it is never desired for its own sake, but only for the sake of the 
commodities which it will enable ns to procure. The coin which a 
man keeps in his pocket does not, like his shoes or his hat, contrib- 
ute to his comfort ; it is a convenience to him only as it supplies 
immediate means for making small purchases or satisfying small 
demands. 

In this respect, it corresponds perfectly, if I may adopt Adam 
Smith's illustration, to the land which is used for roads and other 
avenues of passage and transportation. The land thiis appropri- 
ated yields no rent ; it cannot be used for the purposes either of 
agi-iculture or building. We cannot do without the roads, any 
more than we can do without money ; but the necessity of devot- 
ing much land to this xise is a tax \ipon the community, and a tax to 
a serious amount ; for it yields no profit, and it costs a considera- 
ble sum to keep it in repair. So the cost of the Money which a 
commimity needs is a serious drain upon its resources. For 
Money also needs to be kept in repair ; the loss by abrasion, 
by actual rubbing down through much handling, is considerable. 
The abrasion of silver coin in circulation is estimated at one half 
of one per cent annually ; of gold coin, one tenth of one per cent 
annually. The deficiency in weight of the old, worn coins, when 
they are called in to be recoined, has to be made up by the public. 
McCulloch estimates the whole loss from abrasion, and from such 
accidents as shipwi-ecks, fires, and forgetting the places where 
hoards of it have been buried or otherwise concealed, at one per 
cent a year. 

This, however, is not the heaviest charge which the possession 
of a large amount of coined money entails upon the nation. The 
loss of profit or interest may be estimated by regarding the specie 
currency as so much unproductive wealth, which, if it were turned 
into active capital, would increase the national income by a lai'ge 
annual profit. The aggregate currency in tliis country in 1860, 
just before the Rebellion, was about 350 millions of dollars; 
namely, 200 millions in bank-bills, and about 150 millions in 
specie. The average rate of profit throughout the United States 
is at least as high as ten per cent ; add one per cent for the loss 
by abrasion, and by shipwrecks, fires, etc., and we have over 38 
millions for what would have been the annual cost of our cur- 



256 THE THEORY AND USES OF MONEY. 

rency, had it consisted exclusively of specie. In fact, nearly two 
thirds of it consisted of bank-notes, a cheap substitiite for coin ; so 
that the actual cost was but eleven per cent a year on 150 millions 
of specie. 

There is no occasion to undervalue the real service that is ren- 
dered by Money ; it is just as essential in every civilized, nay, in 
every barbarous community, as a system of roads or other means 
of transportation. Our only point is, that it is a very expensive 
servant, and that the true policy of nations is to get along with 
the use of as little of it as possible. We need a certain amount 
of Money, proportioned to our population, the extent of our terri- 
tory, and the magnitvide of our commercial operations ; to attempt 
to amass a larger amount than this, would be as great a folly as 
to lay out a greater number of roads than is necessary, and to 
build more carriages than are needed to carry the freight and 
passengers. Because specie is costly, there have been invented 
of late years a great variety of cheap substitutes for it, chiefly 
various forms or sorts of bank-notes, some of which are very use- 
ful, and others very mischievous expedients. The great advantage 
that gold and silver money possesses over them all is the perfect 
security that it affords ; the great disadvantage is its expensiveness. 

It would seem, then, that almost any commodity might, by 
common consent, be used as Money ; and, in fact, different 
nations have employed a great variety of articles for this purpose. 
The North-American Indians used wampum, or small shell beads 
strung together, as ornaments ; and our Puritan ftithers, having 
very little silver and gold, gravely adopted this Indian money, 
and conducted their own trafl&c with each other, as well as with 
the savages, in wampum. Afterwards they used Indian corn, 
their staple product, as currency. Some African and East-Indian 
tribes use cowries, another kind of small ornamental shells strung 
together ; the inhabitants of Newfoundland adopted dried cod for 
this purpose ; and the Abyssinians, rock-salt. 

Some considerations of convenience, however, have generally 
inclined civilized nations to adopt one or more of the metals for 
use as Money. *' Metals can be kept not only with as little loss as 
any other commodity, scarce anything being less perishable than 
they, but they can likewise, without any loss, be divided into any 
number of parts, and by fusion these parts can be easily reunited, 



THE THEORY AND USES OF MONEY. 257 

— a quality which no other equally durable commodities possess^ 
and which renders them peculiarly fit to be the instruments of 
commerce and circulation." The quantity of metal can be prov 
portioned to the precise quantity of any other commodity which 
we have occasion to purchase. The weight and purity of a lump 
or bar of metal can also be determined, once for all, with great 
exactness ; and when determined, they can be made known by a 
stamp, proper precautions being taken against this mark being 
counterfeited, and the stamp being made to cover the whole 
surface of the piece, so that no portion of it can be abstracted 
without the loss being readily pei'ceived. The trader is thus 
relieved from two very considerable inconveniences, — the trouble 
of weighing and of assaying every piece of metal which he receives. 

The want of a convenient medium of exchange increases in a 
direct ratio with the progress of the Division of Labor, and the 
consequent development of commercial industry. In the earliest 
stages of society, when each family raises and manufactures nearly 
all the commodities which it consumes, and therefore needs to effect 
but few exchanges, and can generally transact these by directly 
bartering its superfluities for necessaries, a very rude medium of 
exchange will be sufficient, or the people can do without Money 
altogether. But when the Division of Labor is so far advanced that 
one man manufactures only a part of a knife-blade, or the fraction 
of a pin, and the industry of his neighbor is eqvially limited, some 
article must be selected for use as Money, which will be a con- 
venient and universally acknowledged measure of value, and possess 
all the other attributes requisite for effecting exchanges with quick- 
ness and facility. 

Various metals have been used at different times for this pur- 
pose. The Spai'tans adopted iron, the ancient Romans copper, 
the Russians, at one time, platiniim ; but modern nations, with 
great unanimity, have preferred silver and gold. One reason for 
this preference is, that they have great value in proportion to 
their weight and bulk. Silver, of course, is less convenient in 
this respect than gold 5 to pay a debt of a quarter of a million 
of silver dollars would require the transfer of about seven tons of 
metal. But the capital consideration in favor of these metals 
is, that they arc less subject to fluctuations in value than any 
other commodity whatsoever. From the time when the precious 
17 



258 THE THEORY AND USES OF MONEY. 

metals were first generally adopted for this purpose, up to the 
year 1848, they underwent only one great change in value, — ■ 
that which followed the great increase in the supply of them 
consequent upon the discovery of the mines in Spanish America. 
This event, in the course of a century and a half, caused a de- 
pression of their value to about a fourth part of what it had been ; 
that is, an ounce of silver or gold in 1650 would purchase b'lt one 
fourth as much food as could have been obtained for it a century 
and a half earlier. With this exception, and excepting also the 
change which the influx of Californian and Australian gold is now 
effecting, the precious metals have been very steady in value ; 
their quantity cannot be suddenly diminished; and the demand 
for them is so great, that any unusual productiveness of the 
mines cannot speedily lower their value. 

For obvious reasons, two or three metals are generally used 
together, for different denominations of money, in the same cur- 
rency. Gold, which contains the most value in proportion to its 
bulk, is most convenient for large payments; it is not so weU 
adapted for "making change," as it is called, or settling the 
fractional parts of an account, even the gold dollar which is coined 
in the United States being inconveniently small. For sums vary- 
ing from five cents to a dollar, silver is the most convenient 
medium, copper being used when even a silver piece would be 
too minute in size. 

" Whatever may be the advantages attending the use of coined 
money," says McCulloch, " and they are great and obvious, it is 
necessary to observe that its introduction does not affect the 
nature of exchanges. Equivalents are still given for equivalents. 
The exchange of a quarter of corn for an ounce of pure unfash- 
ioned gold bullion is undeniably as much a real barter as if 
it had been exchanged for an ox or a barrel of beer. But sup- 
posing the metal to have been formed into a coin, — that is, marked 
with a stamp indicating its weight and fineness, — it is plain that 
circumstance could have made no change in the terms of the 
barter. The coinage saves the trouble of weighing and assaying 
the bullion, but it does nothing more. A coin is merely a piece 
of metal of known weight and fineness ; and the commodities 
exchanged for it are always held to be of equal value." 

To ascertain the relative value of different commodities at ai^ 



THE THEORY AND USES OF MONEY. 259 

one time and place, I have already said that Money is the best 
measure, simply because a silver dollar or a gold sovereign is a 
well-known and convenient unit of measurement ; when the coin- 
age is in a perfect state, any one dollar or sovereign is precisely 
equal in weight and fineness to any other dollar or sovereign ; and 
every article of value is more frequently exchanged for Money than 
for any other one commodity. Tell a shoemaker that a certain 
house is worth so many dollars, and the information will be defi- 
nite and intelligible to him ; for he has been accustomed to barter 
shoes for dollars, so that, knowing what is the relative value 
of these two things, he can know by inference the relative value 
of the house and shoes, — the article that he is best acquainted 
with. But tell him that the house is worth so many oxen, and the 
information will probably be of little use ; for he has not been 
wont to exchange shoes for oxen, and he knows that oxen differ 
widely from each other in A^alue. 

To ascertain the relative value of commodities at different times, 
especially if a long lapse of years has intervened, a bushel of 
wheat is a better unit of measurement, though still an imperfect 
one, than a dollar. The discovery of new mines or deposits of the 
precious metals, or the exhaustion of old ones, may have so far 
affected the value of bullion, that an ounce of it at the later date 
may purchase only half as much, or twice as much, as at the 
former one. The quantity of silver contained in a dollar in 1650, 
for instance, would buy only one fourth as much grain or meat 
as in 1500. But it cost about the same amount of labor to raise 
a bushel of wheat at one of these periods as at the other ; and the 
whole quantity of wheat raised in England bore about the same 
proportion to the whole number of persons to be fed. The value 
of wheat, then, taken on an average for long 2>eriods, is more stable 
than that of gold and silver. Still it is but an approximation 
to the ideal standard of value, which should be absolutely invaria- 
ble. The corn-rents of lands in England which are let on very 
long leases have depreciated in value much less than the money- 
rents. A still nearer approximation to a fixed standard of value 
might be obtained by taking the average prices of a dozen of the 
most necessary articles in common use, wheat being one of them, 
and sheep, oxen, hides or leather, wool, tallow-candles, soap, etc. 
being added. In the average of many, the effect of accidental 



260 THE THEOKY AND USES OF MONEY. 

circumstances in varying the price of any one of them for a few 
years would be less a source of error. 

The relative value of commodities at different places, as weU 
as at different times, cannot be determined with any accuracy. 
Owing to differences of soil and climate, and the immber of articles 
that are used for human sustenance, the cost of food varies widely 
in different parts of the globe. The value of the precious metals 
in different lands will depend upon the extent of the use which 
is there made of them, upon the distance of the mines that pro- 
duce them, and upon the ease or difficulty of communication with 
the mining-regions. Perhaps the nearest approach to a standard 
in such cases may be found in the value of an ordinary day's labor 
of a person of average strength and health. But it can be easily 
shown that this is only a rude approximation to the truth. Ac- 
cording to Mr. Senior, " the average annual wages of labor in 
Hindostan are from one pound to two pounds troy of silver a year. 
In England, they are from nine pounds to fifteen pounds troy. 
In Upper Canada and the United States of America, they are 
from twelve pounds troy to twenty pounds. Within the same 
time, the American laborer obtains twelve times, and the English 
laborer, nine times as much silver as the Hindoo." This inequal- 
ity must be attributed in great part to the undue depression of 
the laboring classes both in England and Hindostan, arising from 
the very unequal distribution of wealth in the two countries ; the 
great bulk of the population thus consisting of laborers for hire, 
who are solely dependent upon wages, and are constantly com- 
peting with each other for employment. In Hindostan, this 
eflfect is very much increased, of course, by the low standard of 
living, and the cheapness of rice and cotton cloth, which, in that 
climate, are almost the only necessaries of life. In America, the 
laborer must have thicker and better clothing, more fuel, and a 
more perfect shelter from the weather ; and he also expects a 
greater amount, variety, and delicacy of food. 

Money is not merely a sign of value, because it possesses value 
in itself; it is the thing signified. It is custom and the general 
consent of the community, not the authority of government, nor 
the stamp upon the face of the coin, which causes Money to pass 
current, like other commodities, and to be received in exchange 
for them. The stanap is a convenience, as we have seen ; for it 



THE THEORY AND USES OF MONEY. 261 

saves the trouble of weighing and assaying every piece which the 
seller receives. But if government should affix the stanap which 
now belongs to a silver dollar to a piece of copper of similar shape 
and size, and should call this base coin a dollar, it could not oblige 
the people to receive it as such, or to give their goods in exchange 
for it at its nominal valuation. The business of coining Money, or 
of dividing the precious metals into pieces of a convenient shape 
and size, and affixing a convenient stamp, is usually retained 
£xclusively in the hands of the government, to secure the advan- 
tages of uniformity, undivided responsibility, and public confi- 
dence. If individuals were allowed to assume this office, we 
should be perplexed by a multitude of coins of different de- 
nominations, and we could never be sure that the stamp cor- 
rectly indicated the weight and fineness of the metal. 

Seigniorage is a charge made by government to defray the ex- 
penses of the mint, or the cost of converting bullion into coined 
money. The machinery for coining money is now brought to 
such perfection, that the actual expense of this pi'ocess is but 
trifling ; it is computed to amount to one-fifth of one per cent 
(.002) for gold coins, and three-fourths of one per cent (.0075) for 
silver coins. Some governments, among which, till recently, were 
those of Great Britain and the United States, performed this work 
gratuitously, or took upon themselves the expense of the coinage. 
Any person might carry any amount of gold and silver bullion of 
the requisite fineness to the mint, and, after the time required for 
coining so much metal had elapsed, or as soon as the demands of 
previous applicants were satisfied, he was entitled to receive an 
exactly equivalent weight of gold or silver coins. But the time 
required for the process, or to satisfy previous comers, involved 
the loss of a small amount of interest; and it was therefore 
provided that the depositor of gold bullion shall always pay one 
half of one per cent in order to receive the coin immediately, and 
the government reserves to itself the privilege of issuing as much 
silver coin as the public seem to require, at a profit of about five 
per cent. The French government levies a seigniorage of one 
third per cent on gold and one and one-half per cent on silver. 

Some writers have contended that the state should not make 
any charge for coining Money, but that the expenses of the mint 
should be defrayed by the public. They have an indefinite impreB- 



262 THE THEOEY AND USES OF MONEY. 

sion that the quantity of precious metals iu the country might 
thus be increased, persons being encouraged to bring them hither 
lay the opportunity of having them manufacttured, or coined, gra- 
tuitously. Of course, this liberal offer of the government would 
tempt them to bring more bullion here to be coined ; the only 
question is, whether it would stay here after it was coined. It is 
difficult to see that the country would gain anything by having 
fifty millions of dollars annually brought hither in bullion for the 
sole purpose of receiving the government stamp, and then imme- 
diately exported to Europe, without paying our mint anything for 
the process w^hich costs over half a million of dollars. During the 
five years beginning in January, 1850, the United States mint and 
its branches coined over 260 millions of dollars in gold. Hardly 
one third of this great amount of coin was needed for our own use ; 
in fact, the custom-house returns during this period show that 
about 170 millions in specie were shipped from this country to 
Europe. What possible advantage can there be in bringing hither 
more gold than we want, transporting it first from San Francisco 
to New York, thence to Philadelphia, coining it there gratuitously 
at a heavy expense, carrying it back to jSTew York, and then ship- 
ping it off immediately to London or Paris, where it wiU be melted 
up as soon as possible, and converted into English or French 
coins 1 Why should it not be shipped immediately to the place 
where it is needed, thus saving the entire expense of coinage, the 
cost of much unnecessary transportation, and the interest on the 
whole amount for at least two months' needless delay 1 It must 
not be supposed that England will obtain the gold, either as bul- 
lion directly from San Francisco, or as coin by way of New 
York, without rendering a full equivalent for it in other commodi- 
ties ; or that the United States suffer any loss by allowing the 
miner to exchange his gold for other goods. Gold is only an arti- 
cle of merchandise, like copper, tin, and iron ; and, like them, it 
must be sent to the market where it is most wanted, and where, 
consequently, it can be sold to the greatest advantage. Would it 
be good policy, in order to increase the stock of copper in this 
country, to enact that the pig-metal should be manufactured into 
sheets, plates, and rods at the expense of government, without 
charge to the owner, who should also receive a free gift of the in- 
terest on the whole value of the copper during the time required 



THE THEORY AND USES OF MONEY. 263 

for its manufacture 1 Such a law would doubtless bring all the 
Chilian copper hither, to be put into a form fit for use, and Eng- 
land and France would then obtain their share of it without any 
charge for the transformation it had undergone. 

An alteration in the relative value of gold and silver, or, indeed, 
of any other two media of exchange which are united in one cur- 
rency, pi-oduces immediately a marked effect. The one which has 
lost value relatively, since it now passes for more than it is really 
worth, at once displaces or pushes out the other, and takes the 
whole circulation to itself. It seems paradoxical that the com- 
munity should prefer bad Money to good ; but the reason is obvi- 
ous. Suppose the paper dollar to be so depreciated that it is 
actually worth only 98 cents in coin, though it is still legal tender 
for a dollar ; then, every one who pays a debt or makes purchases 
with specie really gives two per cent more than is necessary. This 
difference, though it may appear slight, becomes considerable when 
the amount is large ; by paying paper instead of coin, the debtor 
saves $ 20 on every thousand. Those who hold the specie, there- 
fore, will use only paper in their ordinary transactions, and will 
either melt up the coin or send it abroad, since they can thus 
obtain as much value for $ 980 as they would otherwise receive 
for $ 1,000. 

Hence it is easy to see why specie disappears from circulation 
as soon as Paper Money is made legal tender. Even if the quan- 
tity issued is not excessive, (which it almost always is,) the paper 
dollar is still at a slight disadvantage as compared with coin ; for 
it cannot be exported. Merely because we cannot buy goods with 
it from foreigners, it will not be worth so much as coin by one 
or two per cent ; and even this difference will cause the gold to 
be hoarded or sent out of the country. When the depreciation 
increases to four or five per cent, even the silver " change " will 
disappear ; it will be gathered by brokers, and either be melted or 
sent abroad. In 1862, the banks and the government having 
suspended specie payments January 1st, all the gold coin in the 
country was immediately hoarded ; and before the next July, 
nearly all the silver was sent to Canada, and we were compelled 
to adopt, first, post-office stamps and omnibus tickets, and then 
" fractional currency," or " shin-plasters," as it was derisively 
termed, for purposes of small change. 



264 THE THEOEY AND USES OF MONEY. 

The same principle, that the bad Money always drives ont the 
good, explains the difficulty which has been experienced, both in 
England and the United States, in getting rid of a worn and 
clipped silver currency. In 1695, English silver coins had thus 
lost so much of their value, that 30, instead of 21, shillings passed 
for a (gold) guinea ; and though eight persons were hanged in one 
day for the crime of clipping, the evil continued to increase. The 
government erected new machinery in the mint, and issued new 
and perfect half-crowns, shillings, and sixpences in great numbers ; 
but, to their amazement, this good Money disappeared as soon as 
it was issued, and only the mutilated coin remained in circulation. 
People marvelled exceedingly, says Macaulay, "that everybody 
should be so perverse as to use light money in preference to good 
money. In other words, they marvelled that nobody chose to pay 
twelve ounces of silver, when ten would serve the turn." Govern- 
ment at last adopted the proper course by taking upon itself the 
cost of renovating the whole coinage, forbidding the clipped money 
to be received in commerce for more than its actual value by 
weight, as so much bullion ; but offering on its own part to give 
new and perfect shillings and sixpences for as many light and 
defaced ones as might be brought to the mint. Many short- 
sighted persons advised the government to put only ninepence 
worth of silver into the new shilling, and thus save to the public 
treasury a portion of the heavy cost of this recoinage. But the 
wiser and manlier course, which John Locke counselled, was 
adopted, — not to sanction the current depreciation or take any 
advantage from it, but to go back to full specie payments. The 
cost to the Treasury was between two and three millions sterling ; 
but then prices of commodities ceased to fluctuate, and it was no 
longer necessary to hang people for clipping and coining. 

In like manner, the small-coin circulation in this country, some 
thirty or forty years ago, was much infested with old Spanish 
quarters, eighths, and sixteenths of a dollar, which were so much 
worn and clipped as not to be worth, on an average, more than 90 
per cent of their nominal value. There was also an uglj foreign 
coin, called a pistareen, so much abraded that it was worth only 
about 18 cents, though it passed current for 20. So long as we 
were foolish enough to keep up the nominal valuation of these 
foreign pieces, all the worn-out coins of Spain, Spanish America, 



THE THEORY AND USES OF MONEY. 265 

and the West Indies came hither and filled up the channels of 
circulation, while the new American pieces, of full value, disap- 
peared as fast as they issued from the mint. The government at 
last adopted a quick and simple remedy for the evil ; it refused to 
receive the worn-out currency except at 20 per cent discount, 
though it had really lost only about 10 per cent of its value ; 
and this movement being seconded by the banks and other public 
institutions, the old coins were immediately collected and melted 
up, as they could not be circulated except at a loss of 10 per 
cent. 

We can now understand the evil and the difficulty of attempt- 
ing to keep up a double standard of valuation ; that is, of 
ordaining that hotli gold and silver shall be the measure of value. 
This can be done, of course, only by determining very accurately 
the relative value of these two metals ; in other words, by de- 
claring how many grains of silver shall be the equivalent of one 
grain of gold. Unfortunately, the ratio of these two values is 
inconstant. Governments are unable to keep it fixed ; it fluctu' 
ates slightly from year to year, and even from week to week, 
according to changes in the bullion-market depending on the 
varying needs of business and the varying productiveness of the 
mines. Fix the relative values of the two metals in the coinage 
as accurately as we may, for the time being ; before a year has 
elapsed, a change may occur in the bullion-market, and then the 
coin of that metal which is overvalued in respect to the other — 
that is, the one which passes for a little more than it is worth — 
will push out of use the other, which passes for a little less than 
it is worth. There will be a profit in continuing to use the 
former only as Money, and in melting the latter up into bullion, 
to be sold as a commodity. No matter how slight the change may 
be, even if not more than one per cent, it will destroy the balance 
of the circulation ; and then the public will suffer from the want, 
either of gold coins wherewith to make large payments, or of 
silver coins wherewith to make small payments. 

To maintain both gold and silver as measures of value is as 
hopeless an undertaking as trying to make two clocks the stand- 
ards of time. Though they should be adjusted to each other ever 
so accurately, still their varying rates would soon create a slight 
discrepancy between them, and then no one could teU what time 



266 THE THEOKY AND USES OF MONEY, 

of day it was. England adopted gold as the only standard in 
1816; the United States did the same in 1853; and, since those 
periods, the coinage of both countries has been in excellent 
condition, leaving nothing to be desired. Formerly, each of these 
governments attempted to make both gold and silver the common 
measure, and thereby suffered great inconvenience by the frequent 
changes of the law, by the disappearance of one kind of coin from 
circulation or its presence only in a worn and degraded state, and 
by the frequency of the crimes of coimterfeiting and clipping. 

In the United States, up to 1834, the dollar, which was our 
legal tender, contained either 24.7 grains oi pure gold, or 371.25 
grains of pure silver. These numbers are to each other, very 
nearly, as 1 to 15, which was about the relative market value 
of the two metals when this regulation of the mint was first 
established. But silver becoming more abundant through the 
increased product of the Mexican mines, gold rose in relative 
value, and therefore disappeared from circulation. To bring it 
back again. Congress altered the law, and put only 23.2 grains 
into the gold dollar, leaving the silver dollar as before, thereby 
establishing the ratio of 1 to 16. This answered admirably for 
a while, the two metals circulating side by side, and the coins 
from both being in good condition. 

But in 1851, through the great increase in the annual product 
of gold from California and Australia, gold was depreciated, and 
silver rose in relative value. As the inevitable consequence, 
American silver coins of full weight began to be scarce, and worn 
and defaced ones were attracted hither from other countries. It 
became very difficult to effect small purchases, or to obtain 
" change " for a dollar. Congress had now to undo what it had 
done in 1834 ; and as it was supposed in 1851 that silver would 
continue to rise relatively, as gold fell in value through its in- 
creased annual product, it was wisely determined to adopt so 
decisive a measure that the necessity of another change would not 
soon recur. The double standard was surrendered, and gold was 
established as the only measure of value. According to the law 
of 1853, nothing but gold coin is a legal tender for any debt 
exceeding five dollars in amount. Silver coins, like copper ones, 
are retained in the currency only for subsidiary purposes, — that 
is, for paying small sums and adjusting fractions of a dollar ; they 



THE THEOEY AND USES OF MONEY. 267 

are legal tender only when the sum does not exceed five dollars. 
Copper coins, usually made to pass for nearly twice as much 
as they are worth, are legal tender only up to the smallest 
denomination of silver coin. To retain silver in this subordinate 
position, — not a measure of value, but a convenience for small 
payments, — Congress resolved, in 18.53, that only 345.6 grains of 
pure silver should be put into a silver dollar, instead of 371.25 
grains as formerly, — the reduction being about 6.91 per cent. 
Thus the ratio of gold to silver in our coins, instead of being 
1 to 15, as it was up to 1834, or 1 to 16, as it was from 1834 to 
1853, is now 1 to 14.884. The actual ratio in the bullion-mar- 
ket is now about 1 to 15.6. Hence, the legal ratio before 1853 
undervalued silver about two per cent ; the present one over- 
values it nearly five per cent, so that there will be no occasion to 
make any further change till gold has fallen relatively more than 
five per cent below its present value. At the same time, because 
silver is legal tender only to a small amount, it cannot drive gold 
out of the circulation. The effect of this system is, that the mint 
charges a seigniorage of five per cent for coining silver, and 
refuses to coin more of it than is needed to supply the country 
with small change. 

England adopted this system, giving up the double standard 
and demonetizing silver, thirty-seven years earlier. The adjust- 
ment of the relative value of the two metals made in 1695 worked 
admirably for a time. But silver steadily rose in value after 1717, 
so that perfect silver coins disappeared, and only those which were 
worn or clipped remained in use. In 1816, therefore. Parliament 
reduced the quantity of silver in the shilling 6.45 per cent, thus 
establishing the ratio at 14.21, which is so much below the real 
value of silver that a necessity for further change is not likely soon 
to occur. At the same time, gold was adopted as the sole measure 
of value, and the overvalued silver was prevented from driving the 
gold out of use, by enacting that silver coins should be legal ten- 
der only to the extent of forty shillings. The power to issue these 
coins is vested solely in the government mint, so that too many of 
them may not be thrown into circulation. 

Under this system, as I have said, the coinage of the two coun- 
tries is in a perfectly satisfactory state. The gold and the silver 
coins in use are of full weight, convenient quantities of each are in 



268 THE THEORY AND USES OF MONET. 

circulation, and no further alteration of either is likely to be re- 
quired, as the relative value of silver to gold will not probably fall 
below 1 to 14,88 for many years. But England has virtually kept 
her standard of value unaltered for nearly two centuries, as she 
has not changed the quantity of gold in the pound sterling for that 
time, but has only diminished the quantity of silver in the shilling. 
The United States, on the other hand, by taking off six per cent 
from the gold dollar in 1834, and seven per cent from the silver 
dollar in 1853, has made an absolute, and not merely a relative, dimi- 
nution of the standard of value. Hence the English pound ster- 
ling, which, before 1834, was worth $4.57, is now worth $4.87. 
At present, this is the real par of exchange between the two coun- 
tries, the same quantity of gold being coined, in England, into one 
pound sterling, and, in this country, into $ 4.87. Before 1800, the 
par of exchange between the two countries was % 4.44, silver being 
then of higher relative value than it is now. In the calculations 
of merchants, this sum, $4.44, continues to be the nominal par. 
The whole matter is much simplified by regarding one grain 
of pure gold as the real standard of value all over the civilized 
world.* 

The principle, that money which is depreciated in real value, 
though to a very slight degree, always drives out the sounder 
portion of the currency, received a remarkable illustration from 
the operations of the banks in Massachusetts about fifty years 
ago. Up to that time, the bills of the country banks were re- 
deemed only at their own counters, in various parts of the State. 
The operations of trade brought large amounts of their bills into 
Boston, where they circulated as currency. But the banks in Bos- 

* The following figures may be convenient for reference. I have based the cal- 
culations upon the quantity of "pure, not of standard, gold and silver, since the alloy 
in the coins is not considered to have any value, because it would cost more than it 
is worth to extract it. Thus the value of the coin depends solely upon the quantity 
of pure metai which it contains. Moreover, the proportion of alloy is not the same 
in differeirt (Countries; in England, it is only one twelfth; in the United States, it is 
one tenth. 

©ne pound Troy of pure silver is coined, in England, into 71.73 shillings; in the 
United States, into $ 16.66. The English shilling, therefore, contains 80.3 grains of 
silver; the American dollar, 345.6 grains. 

English shilling = $ 0.23 ; American dollar = 4.348 shillings. 

Then the par with England in silver coin is ^ 1 = $ 4.60. 

Twenty shillings, or one pound sterling in silver, contains 1,606 grains. 

Twenty shillings, or one pound sterling in gold, contains 113 grains. 



THE THEORY AND USES OF MONEY. 269 

tou would not receive them, either on deposit or in payment of 
notes ; for they could not afford to sort them into parcels, find send 
one little parcel into Berkshire, and another to Nantucket, bring- 
ing back from each place a corresponding amount of coin, with all 
the expense of transportation. These country bank-bills, conse- 
quently, not being redeemable in the place where they circulated, 
were naturally depreciated, or became subject to discovmt, in com- 
parison with the bills of the Boston banks, which were redeemed 
in specie on the spot. The discount was very small, varying from 
one to two per cent, according to the distance of the bank from 
Boston. What was the consequence ? These depreciated, and so 
far dishonored, bills drove the good Boston bills almost wholly out 
of the market, and, so to speak, took the circulation to themselves. 
The depreciated country bank-paper was maintained in circula- 
tion ; the good bills, not subject to discount, were returned to the 
banks as soon as issued. Every one knows that the profits of a 
bank, other things being equal, depend on the amount of their 
paper which they can keep in circulation. The country banks, 
therefore, profited by the dishonor of their paper ; the Boston 
banks suffered by keeping up the credit of their bills. This injus- 
tice and loss could not be tolerated. Most of the Boston banks 
entered into a combination, headed by the Suffolk Bank, to compel 
the banks in the country to make provision to redeem their bills, 
not only at their own counters, but also in the metropolis, where 
often they had a larger circulation than in the locality where they 
were issued. Each of these banks was to be compelled to main- 
tain on deposit with one of the Allied Banks, a sum in specie large 
enough to redeem immediately any amount of their own notes 

Ratio of these two quantities = 14.21, silver thus circulating for about 10 per 
cent more than it is worth. 

One pound Troy of pure gold is coined, in England, into i 50.97; in America, 
into $ 248.20. 

Ratio of these two quantities, or par with England in gold = $ 4.87. 

Before 1834, this par was $ 4.57; thirty years earlier, it was $ 4.44. 

The American dollar contains 23.2 grains of gold, or 345.6 grains of silver. 

Ratio of these two = 14.884. 

Market ratio of gold to silver bullion is now about 15.6, or nearly five per cent 
above the American mint ratio. 

The French mint ratio of gold to silver five-franc pieces, of which there are but 
few in circulation, is 15.5; to the smaller silver coins, it is 14.38. 

Par of exchange with France, 25.20 francs = £ 1 = $ 4.87 ; or, one dollar = 5.17 
france. 



270 THE THEORY AND USES OF MONEY. 

which might be offered to any or all the banks in Boston. Then 
the Allied Banks could afford to receive country bank-bills at par. 
They would no longer be subject to discount, and would conse- 
quently keep only their share of the circulation. If any country 
bank should refuse to enter into this arrangement, and refuse to 
make the specie deposit in Boston, the Allied Banks would still re- 
ceive its paper at par, till, having accumulated a large amount of 
its notes, they would suddenly, without warning, cause the whole 
sum to be presented at once at its counter for payment, a measure 
which would infallibly break the recusant bank. 

This was the famous Allied Bank, or Suffolk Bank system, the 
object of so much discussion and obloquy at the time, but now so 
fully vindicated, and still in successful operation. So great are its 
advantages, even to the parties who at first fancied themselves op- 
pressed by it, that other country banks, not within the range of 
the system as first proposed, have petitioned to be admitted into 
it. It is both the duty and the interest of every institution that 
issues bills to serve as currency, to preserve these bills from depre- 
ciation in every place where they circulate to any extent. If, by 
any strange chance in the course of trade, the bills of our Boston 
banks should come to circulate in London, strict justice and sound 
policy would require them to make provision to redeem their paper 
in that city. 

The precious metals have an inherent value of their own, wholly 
apart from their use as money. They are used in the arts, in 
fabricating plate and jewelry, and thus bear a price in the market 
like any other commodity, founded on the uses which they sub- 
serve, and the difficulty of obtaining them, or the amount of labor 
which must be expended for their production. It is a knowledge 
of this fact, that they have an independent value, less liable to 
fluctiiation than that of any other commodity, which gives them cur- 
rency as money, and causes individuals to receive them with confi- 
dence that their value will not be depreciated while in their hands. 
And it is important to observe, that their adoption to serve as 
money considerably augments their intrinsic value, or their worth 
as an article of commerce. It is equivalent to the discovery of a new 
utility of these metals, and a consequent enlargement of the de- 
mand for them, while the supply is left as it was before. The em- 
ployment of a great part, the half, or perhaps three fourths, of the 



THE THEORY AND USES OF MONEY. 271 

whole stock of them on hand, as money, necessarily renders the 
whole more scarce and dear. In a word, the employment of the 
precious metals in manufacture makes them scarcer and dearer as 
money ; and, in like manner, their employment as money makes 
them scarcer and dearer in manufacture. 

There is a larger demand for silver in the arts, and for purposes 
of ornament, than for gold ; and this larger consumption of silver 
makes its value higher in comparison wdth gold than it would be 
if their respective values were determined solely by the compara- 
tive quantity of each which is produced or can be obtained. Silver 
plate, in greater or less qiiantity, is in almost universal use ; gold 
plate, from its greater expensiveness, is hardly at all in use, except 
by crowned heads, or persons of immense foi-tunes. Silver-plated 
ware is also manufactured in great quantities, while comparatively 
few articles are coated with gold, except in the form of gold-leaf, 
which is very cheap on account of its marvellous tenuity and fra- 
gility. Silver spoons are to be found in almost every house ; and 
the consumption of this metal for watches and trinkets is also very 
great. The consequence is, that, though 45 times more silver than 
gold existed, and was annually produced from the mines, the value 
of silver was to that of gold, not as 1 to 45, but as 1 to 1 6. Its 
cheapness enlarged its use ; and the extensiveness of its use, on 
the other hand, counteracted its cheapness, or rendered it dearer. 

If we apply this principle to the depreciation of the value of 
gold, which is now taking place on account of the recently en- 
larged supplies of that metal, we see at once a new limit to that 
depreciation, or a reason why it cannot go so far as it otherwise 
would. To double the present amount of gold bullion in the 
market would not be to sink gold coin to half of its present value. 
As its value fell, the use or consumption of it would be greatly 
increased. Gold plate would become fashionable, gold trinkets 
would be far more common, and gold would even be applied to 
certain purposes in the arts, for which it is admirably fitted by its 
ductility, great specific gravity, and power of resisting oxidation or 
corrosion, — uses from which it is now excluded by its high cost. 
Also, in its use as money a larger quantity would be required. 
200 millions would be needed to effect exchanges that are now 
made with 100. The discovery of America increased the supply 
of gold and silver tenfold ; but they were thereb}'^ reduced, not to 
one tenth, but only to one fourth, of their former value. 



272 THE THEORY AND USES OF MONEY. 

In former centuries, governments, when heavily in debt, often 
had recourse to a depreciation of the coin as a means of relieving 
themselves from their embarrassments. It was beyond their 
power to effect an actual change in the market value of gold and 
silver bullion, such as would result from an enlarged or diminished 
supply of these metals from the mines. But their debts were con- 
tracted in a certain denomination of coin, just as a debtor at the 
present day is bound to pay a certain number of dollars, under an 
implied, but not an express agreement, that the dollar shaU 
retain its present amount of metal, — that is, 345.6 grains of 
silver, or 23.2 grains of gold. If the government should decree 
that the dollar in future should contain only 172.8 grains, he 
might nominally release himself from his debt by paying only 
half of what he had really contracted to pay. This is a very rude 
expedient, — an actual license of universal bankruptcy, all claims 
being released on a payment of 50 per cent. It has not been 
tried in modern times, for even the courts of law would afford a 
remedy against so gross a fraud. But it was frequently resorted 
to in the Middle Ages, and a curious monument of the fact is 
preserved to us in the names of certain coins. The English 
pound sterling, in the time of Edward I. contained a pound Troy 
weight of silver of known fineness ; and the English penny was 
then a real pennyweight of silver, — the twentieth part of an 
ounce, or the two hundred and fortieth part of a pound Troy. 
Even the word shilling seems to have been originally a denomina- 
tion of weight, or another name for an ounce. By successive 
depreciations of the coin, the pound, shilling or ounce, and penny- 
weight of Money have come to contain only a third part of the 
silver which their names indicate. A pound sterling contains less 
than four ounces Troy of silver. The Scotch pound has only a 
thirty-sixth part, and the French livre, or pound, only a sixty-sixth 
part, of their original weight of silver. 

This mode of depreciating the metallic currency was called, by a 
singular abuse of language, "raising the standard." It has not 
been tried in modern times, as I have said, because it is so palpa- 
ble a fraud that the courts of law would probably afford a remedy 
against it. But these courts give no redress, as we all know, 
against a depreciation of paper currency precisely similar in its 
character and effects. 



SUBSTITUTES FOK MONEY. 273 



CHAPTER XIII. 

THE DISTRIBUTION OF THE PRECIOUS METALS THROUGHOUT THE 
WORLD : SUBSTITUTES FOR MONEY AND MEANS OF ECONOMIZING ITS 
USE : BILLS OF EXCHANGE : THE DECLINE IN THE VALUE OF MONEY. 

Metallic currency, we have seen, is a safe but costly means of 
effecting exchanges. It is safe, because it is not subject to such 
ruinous fluctuations of value as have recently taken place in the 
paper currency of this country. It is costly, because the expense 
of keeping it in repair, and the loss of profits on so large an 
amount of what may be called " dead capital," amount, in this 
country, to at least eleven per cent. It then becomes important 
to know what are the substitutes for its use, — substitutes which 
we may expect to find less safe, but also far less expensive, than 
metallic money. And as a preliminary to this inquiiy, we wish 
to know how much currency is needed in each country ; — or 
rather, since its numerical amount cannot be ascertained with any 
precision, how the quantity needed is affected by the growth of 
the population, the extension of commerce, the progi'ess of opu- 
lence, and the general state of civilization ; and also, by what law 
the whole quantity now in existence is distributed among the 
various nations of the earth, and in what way it preserves its 
equilibrium among them. 

In every exchange, the two values which are exchanged for each 
other are supposed to be equal. Every exchange is a barter of a 
quantity of merchandise for a certain sum of money which is its 
equivalent. But it does not follow that there must be as much 
money as there is merchandise ; for as the money is not consumed 
by effecting this one exchange, it is ready immediately to effect 
another. The same piece of money may be exchanged successively 
for any number of articles of merchandise of the same value ; in 
other words, any sum of money can purchase successively quanti- 
ties of merchandise worth an indefinitely larger sum. 

The circulation of money and of merchandise bears some anal- 
ogy to the momentum spoken of in physical science, which is com- 
posed of the velocity multiplied by the mass : the momenta are 
equal, though the velocity should be increased tenfold, provided 
18 



274 THE DISTEIBUTION OF GOLD AND SILVER: 

that the mass is but one tenth part as great. So, also, the momen- 
tum of wealth is its value multiplied by the rapidity of its circula- 
tion. As money circulates far more rapidly than merchandise, it 
is evident that the quantity of money may be as much less than 
the quantity of merchandise as the circulation of the money is 
more rapid than the circulation of the merchandise. If the value 
of the merchandise which changes hands in a year is a thousand 
millions, and the circulation of the money is ten times as quick 
as that of the merchandise, a hundred millions of money will 
effect all the exchanges. Let the quickness of the money circula- 
tion be doubled, and fifty millions will suffice. 

"If we assume," says Mr. Mill, "the quantity of goods on sale, 
and the number of times those goods are resold, to be fixed quan- 
tities, the value of money will depend upon its quantity, together 
with the average number of times that each piece changes hands 
in the process. The whole of the goods sold (counting each resale 
of the same goods as so much added to the goods) have been ex- 
changed for the whole of the money, multiplied by the number of 
purchases made on the average by each piece. Consequently, the 
amount of goods and of transactions being the same, the value of 
money is inversely as its quantity multiplied by what is called the 
rapidity of circulation. . And the quantity of money in circulation 
is equal to the money value of all the goods sold [including all the 
resales as additional goods], divided by the number which ex- 
presses the rapidity of circulation." 

Stating the matter algebraically, we have 
g s^=m r; 

where g = quantity of goods on sale ; 

s = number of times the goods are sold ; 
m = quantity of money in circulation ; 
r = number of purchases effected by each piece of money. 
Of course, any three of these quantities being given, the fourth 
can be deduced from them. Thus, 

gs 

m ■=z^— ; 
r 

which is the principle just enunciated. It is also evident, that 
the value of money will be inversely as its quantity ; for if we 
suppose the quantity of money to be doubled, we stiU have 
g s = 2 m r ; 



SUBSTITUTES FOR MONEY. 275 

whence, 2 to =: — ; 

r 

that is, 2 m are worth ouly the same vahie which was formerly 
represented by m. 

This calculation really includes all exchanges that are directly 
effected by barter, or into which money does not enter ; and these, 
as we shall afterwards see, constitute a large part of mercantile 
transactions. The formula professedly represents, it is true, only 
money purchases. But to economize the use of money is the same 
thing as to increase its rapidity of circulation. If, on an average, 
one thousand exchanges of merchandise are effected with one 
hundred dollars in money, and if means should be found to carry 
on half of all trade without any money, then the one hundred 
dollars will suffice to effect two thousand exchanges. Observe, 
however, that this economy relates solely to the use of money as 
a medmm of exchange, and not at all to its other function as a 
measure of value. 

" The phrase, ' rapidity of circulation,' " continues Mr. Mill, 
" requires some comment. It must not be understood to mean 
the number of purchases made by each piece of money iii a given 
time. Time is not the thing to be considered. The essential 
point is, not how often the same money changes hands in a given 
time, but how often it changes hands in order to perform a given 
amount of traffic. We must compare the number of purchases 
made by the money in a given time, not with the time itself, but 
with the goods sold in that same time. If each piece of money 
changes hands on an average ten times while goods are sold to the 
value of a million sterling, it is evident that the money required 
to circulate those goods is £100,000." 

" Bapidity of circulation being a phrase so ill adapted to express 
the only thing which it is of any importance to express by it, and 
having a tendency to confuse the subject by suggesting a meaning 
extremely different from the one intended, it would be a good 
thing if the phrase could be got rid of, and another substituted, 
more directly significant of the idea meant to be conveyed. Until 
an appropriate term can be devised, w'e must be content to express 
the idea by the circumlocution which alone conveys it adequately, 
namely, the average 7ii(mJ>er of purchases made by each piece in order 
to effect a given pecuniary amount of transactions.^^ 



276 THE DISTRIBUTION OF GOLD AND SILVER: 

As a nation increases in opulence, the value of the merchandise 
it circulates also increases ; and consequently it has need of more 
money. But this need does not increase in the same proportion 
with its wealth. In rich countries, the activity of the circulation 
enables the people to effect their exchanges with a smaller quan- 
tity of money. A given sum will suffice for ten exchanges, when, 
in a poor country, it might have effected but one. Besides, it is 
in wealthy countries that credit most easily takes the place of 
money. Not only bank-bills, but all sorts of private obligations, 
— drafts, bills of exchange, sales on credit, and clearances, (terms 
which will afterwards be explained,) — all become substitutes for 
money. 

Confining ourselves for the present to the distribution of coined 
money among different nations, I observe, that the amount which is 
needed by any country, and which actually circulates among its in- 
habitants, does not depend in the least upon the quantity which 
the government of that country sees fit to coin, or upon the activity 
of its mint. International exchanges bring the coin of one coun- 
try to circulate in another ; sometimes it is melted up and coined 
over again for this purpose ; sometimes it circulates, or is held in 
reserve, under its original stamp. Often the larger portion of the 
specie reserves held by our banks consisted of English sovereigns. 
During the sixteenth and seventeenth centuries, Spain and the Span- 
ish colonies had the first coinage of nearly all the precious metals 
which found their way into circulation in Eiu'ope, simply because 
Spain owned the most productive silver and gold mines. During 
the twenty years ending in 1870, the United States mints coined 
about 900 millions of dollars ; and more than three fourths of this 
sum were sent abroad, most of it probably being melted up and 
coined over again in Europe. The fact is, — and I crave attention 
to the statement as an important and pregnant one, — that the 
quantity of the precious metals retained in circulation as coin in each 
country regulates itself, through its ratio to the amount of money 
needed by all mankind to effect their exchanges, — regulates itself 
wholly irrespective of the efforts made by one government, or by 
all governments, to increase or diminish its amount. If more 
money is coined than is thus needed to supply the want, it will 
infallibly be melted up again or be sent abroad ; if the mints are 
not active enough to supply this want, a pressure will be felt 



SUBSTITUTES FOR MONEY. 277 

somewhere, which will compel them to quicken their action, or 
private coiners will take the business out of their hands, or 
foreign coin will be imported. 

No one nation can, either by the efforts of its government, by 
its laws, or by concert among its individual members, increase or 
diminish the quantity of money that circulates among them ; — 
by no efforts directly looking towards this end, I should say ; 
for, unquestionably, a t}Tannical or foolish government, or an 
unwise course of legislation, may paralyze the energies of com- 
merce, root out manufactures, or blast the hopes of the agricul- 
turist, and thus lessen the amount of money needed, by destroying 
many of the enterprises and exchanges in which money is em- 
ployed. But no laws prohibiting the exportation of specie, or 
making it penal to melt up the current coin, — no laws designed 
to foster one branch of trade more than another, under the belief 
that this particular traffic brings more coined money into the 
country than any other, — no such laws, I say, can ever perma- 
nently increase the amount of money in circulation. Money 
distributes itself among different nations in due proportion to the 
circumstances of each, just as easily as water finds its level in a 
pond ; and such legislation as I have just adverted to can have no 
more effect upon such distribution than would be produced upon 
the level of the pond by dipping up water in a bucket from one 
part and pouring it into another. 

It is possible, to be sure, to displace a portion, or even the 
whole of the specie currency, and make paper currency, or 
some other substitute, take its place ; and the specie thus dis- 
placed will either go abroad or be melted up. But the total 
amount of the currency will remain just as before ; the value of 
the paper and the precious metals taken together will be just 
what the specie alone would be if paper were not used. Suppose, 
for instance, that the currency of the United States consists of 
200 millions of dollars, of which three fifths are paper mone}^, and 
two fifths are specie. We might destroy all the paper portion, 
and specie enough would flow in from abroad to make up the 
currency to 200 millions again ; or we might add so much to the 
paper, that all, or nearly all, the specie would leave us and go 
abroad. But the impassable limit to the real value of the pa- 
per issued would even then be 200 millions of dollars. If 300 



278 THE DISTRIBUTION OF GOLD AND SILVER: 

millions of paper dollars were stamped and issued, the inevitable 
consequence would be, that they would sink in value, or become 
subject to a discount of one third, so that the aggregate real value 
would remain as before. 

This self-adjusting power of the currency is a fact which it is 
difficult to establish directly, because the amount actually needed 
changes from day to day with the varying opulence of the country 
and the varying activity of commerce and circulation. If 200 
millions be the amount now wanted, 220 millions may be needed 
next month, as a consequence either of our increased wealth 
within that time, or of a check to oi;r prosperity and a diminished 
activity of circulation, growing out of a general want of confidence, 
and a disposition on the part both of banks and of individuals to 
hold larger sums in reserve. The practice of hoarding, though 
most common in the Asiatic states, where it is a precaution taken 
by individuals against arbitrary exactions by a despotic govern- 
ment, is not \inkno\vn in the most civilized communities of Europe 
and America. In times even of general prosperity and quiet, 
many persons of the lower, and more ignorant classes keep by 
them a little fund in specie, stored away, perhaps, in an old 
stocking, as a precaution against a rainy day ; and though the 
establishment of Savings' Banks has greatly diminished the num- 
ber and amount of these little hoards, there are still enough of 
them, in the aggregate, to keep a considerable portion of the 
metallic currency, as it were, in a state of abeyance. If the cur- 
rency be a mixed one of paper and specie, and if some event 
should happen to disturb public confidence, such as the bursting 
of a commercial bubble, or the discovered mismanagement of two 
or three banks, then commences what is called " a run upon the 
banks " generally, the effect of which is greatly to increase the 
number and amount of these hoards. To provide against the pos- 
sible recurrence of such panics, the banks are obliged to keep 
much lai'ger amounts of specie in reserve than would suffice for 
their ordinary transactions. The quantity of specie required as a 
basis and security for the circulation of the banks is like the 
thickness of timber and planking in the sides of a ship ; it must 
suffice not merely for ordinary fair weather, but for possible storms 
and squalls, and now and then a sand-bank. The gold and silver 
coin thus stored up by banks and individuals is not a part of the 



SUBSTITUTES FOR MONEY. 279 

circulation proper ; the whole currency of the country may be 
divided into two portions, only one of which is active, or is daily 
employed in effecting exchanges ; the other for a time is latent. 
This last portion is somewhat arbitrary in amount, depending 
upon the character of the people and their mood for the time 
being ; it is only the active portion of the cun'ency which has the 
self-adjusting power that I have spoken of 

There ai'e now (1870) over 100 millions of specie dollars in the 
United States Treasury, and jDrobably half as m\;ch more held by 
the banks and by individuals ; and this vast sum exists solely as a 
commodity, — as so much bullion, — and has no more effect on 
prices than if it were sunk in the Atlantic Ocean ; since the prices 
of commodities here are now detei'mined solely by the quantity of 
Paper Money in circulation. In respect to the varying amounts 
of specie thus held in reserve by the banks and the government, or 
hoarded by individuals, and so not entering into active circulation, 
Mr. Tooke justly observes, that " transmissions of the precious 
metals might and would take place occasionally between [Great 
Britain] and other countries to a considerable amount, without 
affecting the amount or value of the currency of the country from 
which or to which the transmissions were made ; and without 
being a cause or a consequence of alteration in general prices." 
The stock of specie and bullion in the Bank of England, which, 
before 1848, used to average only about eight or nine millions 
sterling, in the summer of 1852 rose to 22 millions, or more than 
double the amount which the law regards as a safe basis for its 
circulation. But the amount of bank-notes in active circulation 
was not thereby increased ; it was not materially greater than it 
had been six years before. At least 12 millions of this large bank 
reserve might have been sent to foreign countries, to import com 
or any other needed article, without withdrawing a sovereign from 
the active currency, or affecting in the slightest degree the prices 
of other commodities. 

Every export of the precious metals, therefore, is not to be re- 
garded as a contraction of the currency properly so called, nor is 
every import of them an enlargement of it. At the present time, 
in consequence of the large supplies from California and Australia, 
large amounts of bullion are in transitu, — wandering about, as it 
were, from one country to another, to find where they wUl be of 



280 THE DISTEIBUTION OF GOLD AND SILVER: 

most value, -^- before they pass into active circulation as currency. 
The stock of bullion in the hands of goldsmiths and silversmiths, 
ready for conversion into plate or jewelry, and, still more, the stock 
of it which already exists in the form of plate, the setting of jewels, 
lace, gilding, etc., might surely be exported in part, or altogether, 
without affecting the money market, or lowering the prices of com- 
modities generally. But at least seven millions sterling out of the 
specie reserve in the Bank of England is as dead for all purposes 
of circulation, or for any effect upon prices, as if it existed only in 
the form of plate ; for the reserve has not fallen below eight mil- 
lions for the last twelve years, and we have only the word of the 
bank officers for our assurance that this sum still exists in the 
vaults, where it has remained undisturbed at least since 1858. It 
is only when the demand for the precious metals to be exported 
has so far reduced the stock of specie in the banks as to alarm the 
latter for their own safety, and thus to cause them to diminish 
their discounts and their circulation, that the self-regulating power 
of the active currency shows itself. 

The power of Money thus to determine its own amount arises 
from the reciprocal action of the quantity of money in active circu- 
lation and the prices of commodities. All exchange, as I have said, 
is a barter of merchandise for money ; and the quantity of money 
which an article of merchandise will command in the market is 
termed its price. Increase that quantity, and the price of all ar- 
ticles inevitably rises ; diminish it, and the price as certainly falls. 
The whole process of exchange may be compared to the operation 
of weighing with a well-poised balance, the money and the mer- 
chandise being placed on the opposite arms of the lever ; increase 
the weight on the money side, and the merchandise is sure to rise. 

We can easily see, therefore, why the amount of currency for 
the whole world distributes itself, by its own laws, among all na- 
tions, in exact proportion to their respective wants. If by any 
means one nation should obtain a larger portion than belongs to it 
by the regular course of trade, all articles of merchandise belonging 
to that nation must rise in price ; they must be exchanged for a 
larger quantity of money. Articles of foreign growth and manu- 
facture would be irresistibly attracted thither by this alteration of 
values. A single article might possibly be excluded by prohibitory 
legislation. But no arbitrary enactments can so clip the wings of 



SUBSTITUTES FOR MONEY. 281 

commerce as to prevent it from seeking a market in a country 
"whei'e the prices of all commodities have risen above their average 
value all the world over. Foreign goods must necessarily be im- 
ported in such a case, whether by open trading or by smuggling ; 
and, being imported, they must be paid for. Money is the only 
redundant article in such a community, the only one which can be 
offered in payment ; for all other goods are, by'the hypothesis, of 
a higher price with them than in any other country, and cannot 
be sent abroad but at a sacrifice. Money, then, would be export- 
ed in spite of all coast guards, and even of the penalty of death ; 
and the currency would thus be reduced to its natural level. 

In the other case, if the currency of any nation should fall be- 
low the average proportion to its wants, the prices of all merchan- 
dise there would fall, they being exchanged against a smaller 
amount of money. There would be a tendency, then, to export 
all commodities, since a profit could be made by the sale of them 
in foreign countries rather than at home. And in payment for 
the commodities thus sent abroad, money must be returned till 
the equilibrium of the currency is restored. Thus the equal dis- 
tribution of specie among all countries, in proportion to the wants 
of each, takes place through the inevitable tendencies of trade, aU 
goods invariably seeking a market where they can be sold to the 
best advantage. The equalization of money is but another name 
for the equalization of prices. The general principle has been 
clearly stated by Mr. Ricardo, who has shown " that redundancy 
and deficiency of currency are only relative terms ; and that, so 
long as the currency of a particular countiy consists exclusively of 
gold and silver coins, or of a paper immediately convertible into such 
coins, its value can neither rise above nor fall below the value of 
the cuiTencies of other countries by a greater sum than will suffice 
to defray the expense of importing foreign coin or bullion, if the 
currency be deficient ; or of exporting a portion of the existing 
supply, if it be redundant." 

Regarding this principle as established, that the currency is of a 
fixed amoiuit or value, I come now to consider the various practices 
and expedients by which the necessity of filling up the whole of 
this currency with so costly a material as gold and silver coin is 
obviated. Some of these may properly be viewed, not as substi- 
tutes for the precious metals, but as means of economizing its 



282 THE DISTEIBUTION OF GOLD AND SILVEE ; 

use, — as practices which have grown up in commercial countries, 
whereby commercial transactions are really completed without the 
intervention of any money. Such are what are termed accounts 
current, opened between merchants who have frequent dealings 
with each other. If, for instance, A has occasion, in the course of 
a year, to make a hundred different purchases of B, and B to buy 
as frequently, and about as largely, from A, were each transaction 
to be completed and settled by itself at the time, two hundred 
transfers of different sums of money from one to the other must be 
made in a twelvemonth. But if each party chose to allow the other 
credit till a fixed time for settlement, then the whole amount of piu"- 
chases on one side might be deducted from the whole amount on 
the other, and only the balance be paid in money. If nine tenths 
of an account are thus settled by offsets, and only one tenth by 
cash, it is evident that nine tenths of the trade has been a direct 
barter of one kind of merchandise for another, just as if money, or 
a universal medium of exchange, had never been invented. It is 
by practices analogous to this, rather than by increased rapidity 
of circulation, as I believe, that a nation's want of currency does 
not increase in as rapid a ratio as its population and its opulence. 
Even when the sales are all made by one of the parties, a person 
who has credit with him may adjust by a single payment in cash 
several hundred different purchases made at various times since 
the former settlement. 

Another mode of avoiding the frequent transfer of specie is 
the transfer or sale of debts. If a merchant has a sum of money 
due to him by one person. A, while he owes an equivalent sum to 
another, B, he can cancel both obligations at once, without having 
the money pass through his own hands at all, by simply giving B 
an order upon A for the amount required. Here, one operation — 
one transfer of currency — evidently takes the place of two ; instead 
of A paying the given sum to the merchant, and the merchant im- 
mediately paying it over to B, A pays it directly to B, and the ac- 
count is squared all round. If the merchant does business in New 
York, while A and B are both resident in London, such an order 
is called a hill of exchange, and the saving of trouble and expense 
that is effected by it is very obvious ; without such an order, A 
must pay his debt by shipping the required amount of specie from 
London to New York ; and then the merchant, in order to pay his 



SUBSTITUTES FOR MONEY. 283 

debt to B, must immediately ship the specie back again to London. 
There would then be a loss of time enough for making two voy- 
ages across the ocean, a loss of interest on the money during this 
time, and the cost of freight and insurance on the amount during 
two voyages. All this expense and inconvenience arc saved by 
the simple expedient of a bill of exchange, or an order for the 
transfer of a debt. 

It may happen that the merchant, though he has a debt due 
to him in London, does not himself owe any money in that city ; 
still, he will not be obliged to have the specie sent to him by sea, 
if he can find another merchant in New York who does owe a 
debt in London to precisely the same amount. The first mer- 
chant, C, will then sell his debt to the second merchant, D, or, in 
other words, sell him a bill of exchange, which, when paid in 
London by A to B, at once cancels A's debt to C, and D's debt to 
B. Two payments of money, the one from A to B, who are both 
in London, and the other from D to C, who are both in New 
York, are substituted for two payments, one from A to C, and 
another from D to B, the direct adjustment of which would be 
inconvenient, because the respective parties to them reside in dif- 
ferent cities. 

We can now itnderstand what is meant by the course of ex- 
change. All the mei'chants in New York who have debts due to 
them in London draw bills of exchange for the amount of these 
debts, and go into market to sell these bills to other New York 
merchants who have debts to pay in London. If the former set 
have a larger amount to sell than the latter have occasion to buy, 
— or, in other words, if a gi-eater amount of debt is due from Lon- 
don to New York than from New York to London, — the compe- 
tition of the selling merchants with each other will lower the 
price of these bills a little, or subject them to a small discount. 
A bill of exchange for one hundred dollars may not bring in the 
market more than 98| dollars ; the exchange is then said to be 1^ 
per cent against London, ox \\ per cent below par. It cannot fall 
much lower than this, for the merchant, rather than take 98 
dollars for his bill, will cause the 100 dollars to be sent over to him 
by his London debtor in specie ; the freight, insurance, and other 
charges, cannot amount to more than two dollars. Whenever, 
then, the exchange falls about 1^ per cent below par, we may 



284 THE DISTRIBUTION OF GOLD AND SILVER: 

expect that shipments of specie from England to America will 
begin. On the other hand, if a greater amount of debt is due 
from New York to London than from London to New York, then 
there will be more buyers than sellers of such bills in New York 
market ; and the competition of these buyers with each other may 
cause a bill for $ 100 to seU for $ 101.50. The difference cannot 
be much greater than this, or it would cause specie to be shipped 
from America to England. The exchange is then said to be 
against New York, or 1| per cent above par. 

In order to simplify this explanation, I have supposed the 
metallic currency of the two countries to consist of the same de- 
nomination of coin, — namely, of dollars. But this is not the 
case ; the New York merchant who has a debt due to him in Lon- 
don draws a bill of exchange, not for so many dollars, but for so 
many pounds sterling, or sovereigns. The exchange, as we have 
seen, is really at par when a bill on London for 100 pounds ster- 
ling sells in New York for 487 dollars ; for these two sums contain 
the same quantity of pure gold. The nominal par, established 
before 1800, and ever since retained in exchange calculations, 
made the dollar equal to 4s. 'od. sterling, and the pound sterling, 
therefore, worth only % 4.44. The present value of the pound 
sterling, $ 4.87, is about ^\ per cent more than this ; and there- 
fore the exchange is really at par, when, according to the prices 
current, it is 9|^ per cent above par. The expense of shipping 
specie either way being about \\ per cent, when the exchange 
nominally rises to about 11 per cent, specie will be shipped from 
New York to London ; when it nominally falls below 8 per cent, 
specie will be shipped from London to New York. As the quoted 
price of exchange at New York is for bills on London at sixty 
days' sight, allowance must be made for interest for this time. 

It is easy to see that the par of the currency of any two 
countries means, among merchants, the equivalence of a certain 
amount of the currency of the one in the currency of the other, 
supposing the currencies of both to be of the precise weight and 
purity fixed by their respective mints. Thus, according to the 
mint regulations of Great Britain and France, the same quantity 
of pure gold, which in London is coined into one pound sterling, iu 
Paris is coined into 25 francs and 20 centimes ; and, accordingly, 
this is said to be the par between the two countries. The ex- 



SUBSTITUTES FOR MONEY. 285 

change between the two countries is said to be at par when bills 
are negotiated on this footing; that is, when a bill for £100 
drawn on London is worth 2,520 francs in Paris, and conversely. 
As we have already seen that $ 4.87 in New York equals one 
pound sterling in London, it follows that $ 4.87 also equals 25 
francs 20 centimes in Paris ; or, what is the same thing, one 
American dollar is worth 5 francs 17 centimes and a small 
fraction, which is the par of exchange between France and the 
United States. 

From the explanation now given, it appears very clearly that 
bills of exchange represent the items in the account current be- 
tween England and America ; and the specie shipped either way is 
the cash balance that is struck on the adjustment of the account. 
Bills of exchange are not drawn against air ; they represent real 
transactions. The New York merchant cannot draw bills on 
London unless he has debts due to him there, which debts have 
been contracted for cotton, flour, tobacco, and other American 
products, which he had sent thither to be sold. On the other 
hand, a New York merchant cannot have debts to 2^<^y in London, 
except in return for manufactured goods, whether of cotton, silk, 
woollen, or iron, which he has received from England, and con- 
sumed or sold in America. And in the long run, it is evident 
that our exported goods must exactly pay for our imported goods, 
or the two sides of the account must balance each other. If they 
did not balance, if our exports were not equivalent in value to our 
imports, the deficiency would have to be made \ip by sending 
specie abroad ; and a continued drain of specie, according to what 
has already been demonstrated, would raise the value of the 
money left behind, and, in consequence of raising the value of 
money, would lower the prices of goods in America ; and the 
influx of specie into England would lower the value of money 
there, and raise the prices of goods. Erelong, then, the tide 
would turn ; more goods would be sent from America, where they 
are lower in price, to England, where they are higher in price ; 
and, in p.ayment for these goods, the current of specie would set in 
the opposite direction, till the value of money in the two countries 
was equalized again. 

The exports of any country must exactly balance its imports, 
for the same reason that, when two individual producers of differ- 



286 THE DISTKIBUTION OF GOLD AND SILVER: 

ent articles trade exclusively with each other, they must really 
barter merchaudise for merchandise, exchanging equivalent values 
of different kinds ; money serving no purpose between them but 
that of facilitating the exchanges of goods. It is oil that dimin- 
ishes the friction of exchanges. If, for instance, a hatter trades 
exclusively with a shoemaker, the former can buy no more shoes 
than he can sell hats with which to pay for them. He may, in- 
deed, run in debt for a large stock of shoes at once ; but that debt 
he will be obliged ultimately to pay by restricting his purchases of 
shoes, and enlarging his sales of hats. So, this country, trading 
with all the rest of the world, can buy no more foreign products 
than it has domestic products with which to pay for them. Money 
and bills of exchange cannot help us to pay our debts ; they only 
facilitate and represent the operations out of which those debts 
have grown. 

But it is important to state, that, although we must really pay 
for our imports with our exports, the former must always exceed 
the latter in nominal amount, if we take the home valuation of both. 
This may easily be perceived by attending to a single voyage of 
one ship. Suppose a merchant sends a cargo of oil to Russia, and 
brings back a ship-load of duck, iron, hemp, and other Russian 
products. If his venture be a successful one, it is evident that the 
aggregate value of the return cargo must so far exceed that of the 
outward cargo as to pay the charges of transportation both ways, 
and afford a reasonable profit on both parts of the transaction. 
Estimate the values in the Russian port, and it will appear that 
our general proposition holds true ; the oil exactly paid for the 
duck, iron, and hemp, — the exports just balanced the imports. 
Estimated in the American port, the value of the duck, iron, and 
hemp exceeds that of the oil enough to pay the charges of the 
voyage out and home and leave a profit. 

This illustration brings us to an important qualification of the 
principle as first stated, and to an explanation of another purpose, 
or office, of bills of exchange. To simplify the matter, I supposed 
at first that the United States traded only with England, and we 
were thus led to the general proposition, that foreign trade is really 
a barter of merchandise for merchandise, money playing only a 
very subordinate part in the affair. But foreign trade is actually 
a long and heavy account current of one nation with all the rest of 



SUBSTITUTES FOR MONEY. 287 

the world, charges on one side being set off by charges on the other, 
and the account being finally adjusted by the transfer of a com- 
paratively trifling sum in cash. Our trade is not confined to 
England ; it extends to every nation of the earth, and to every 
isle of the sea. The account is not balanced Avith each nation 
separately; far from it. In the case of China, our purchases much 
exceed our sales ; in the case of the British kingdom, our sales 
much exceed our purchases. We set off one against the other ; 
we pay our debt to China by transfemng to her a portion of the 
debt owed to us by Great Britain, — bills of exchange enabling us 
to transfer debts not only from one individual to another, but from 
one country to another. We annually buy tea and other Chinese 
products to the amount of 10^ millions; we export directly to 
China less than four millions. The balance, which is evidently too 
great to be accounted for solely by charges of transportation and 
profits of trade, we pay by sending to China bills of exchange on 
London. On the other hand, our annual exports to the British 
West Indies are far greater than our imports from these islands. 
We may receive pay for the balance by bills of exchange on Lon- 
don ; that is, the West India planters pay us for the articles of 
provision that we send to them, by transferring to us a part of the 
debt due to them for the sugar, molasses, spirits, etc. which they 
have sent to England. These very bills of exchange, emanating 
from the British West Indies, we might use in paying our debt to 
China for tea. One article of merchandise is really paid for with 
another, though the one is obtained from Canton and the other is 
sent to Jamaica. Very little money is used in the whole circle of 
transactions ; a single shipment of half a million of dollars may 
suffice to balance an immensely long account, opened with Eng- 
land, the continent of Europe, China, and both Indies, amounting 
in the aggregate to sixty or seventy millions. 

If we examine the facts as they are given in the official returns, 
we find that they agree with the theory. In the reports for the 
year 1846, we find the imports amounting to over 110 millions, 
while the specie sent abroad was less than 4 millions ; the exports 
were nearly 102 millions, and the specie received was a little more 
than 3| millions. In other words, a remittance of $ 127,536 in 
cash would have settled an account in which 102 millions were 
sold and 110 millions purchased. 



288 THE DISTKIBUTION OF GOLD AND SILVER: 

If we examine the returns for a series of consecutive years, and 
anywhere find an apparent departure from this rule, either by an 
excessive importation or excessive exportation of specie, we also 
perceive a corresponding excess of exports or imports, proceeding 
from some peculiar causes affecting the course of trade for that 
year ; and we find, moreover, a recoil the following year, produced 
by that self-regulating power of the currency which has been ex- 
plained. The sudden enlargement of our exports in 1847 was 
caused by the great amount of breadstufFs, (68 millions, or more 
than double the average quantity,) shipped from our ports that 
year, to make up for the famine in Ireland and the dearth through- 
out Western Europe. The large amount of coin and bullion re- 
ceived in payment for these breadstuffs made our currency re- 
dundant, and an effort was made the next year to get rid of the 
superfluous money. But no action of the government, no combi- 
nation of individuals, was requisite for this purpose ; the matter 
regulated itself. England had sent away a considerable portion of 
her currency, and therefore the prices of her commodities fell ; the 
United States had received what England had lost, and thei'efore 
prices in America rose. Thus it became profitable to purchase 
goods in England and sell them in the United States ; and thus 
our imports in 1848 suddenly rose to 140 millions (an excess of 16 
millions over the average of 1847 and 1849) ; and, to pay for these 
goods, we exported nearly 16 millions of coin and bullion, which 
restored the balance of the currency. Hence we perceive that a 
debt to a foreign country is always paid, sooner or latei', by send- 
ing commodities thither ; but if the exigency out of which the debt 
has arisen be sudden and considerable, such as is produced by a 
temporary failure of the crops, we send specie in the first place as 
a sort of pledge that the goods, which are the real means of can- 
celling the debt, shall soon be forthcoming. This pledge is subse- 
quently redeemed by forwarding the commodities, and the specie 
then comes back again. At the most, money is only a means of 
temporary payment ; all debts must idtimately be discharged by 
a remittance of commodities. 

When, in the course of international trade, one country becomes 
indebted to another, the question whether the deficiency shall be 
first made up by remittances of money or of goods is one that 
determines itself on the same principles which usually cause one 



SUBSTITUTES FOR MONEY. 289 

commodity to be preferred to another as an article of export. 
The merchant will send the one which he thinks is less valuable 
at home, and more valuable abroad, than any other commodity. 
If coin and bullion answer this condition, — that is, if other 
commodities are dearer at home than abroad, — then coin and 
bulhon will be sent. As Mr. McCuUoch remarks, " if a London 
merchant owe £100 in Paris, he sets about finding out the cheap- 
est method of paying it. On the supposition that the real ex- 
change is two per cent below par, and that the expense of remit- 
ting bullion, including the profit of the bullion-merchant, is also 
two per cent, it will be indifferent to him whether he pay £2 of 
premium for a bill of £1 00 payable in Paris, or incur an expense 
of £2 by remitting £100 worth of bullion directly to that city. 
If the prices of cloth in Paris and London be such that it would 
require £103 to purchase and send as much cloth to Paris as 
would sell for £100, he would undoubtedly prefer buying a bill 
or exporting bullion. But if, by incurring an expense of £101, 
the debtor be able to send as much hardware to Paris as would 
sell for £100, he would as certainly prefer paying his debt by an 
exportation of hardware. By doing so, he saves one per cent more 
than if he bought a foreign bill or remitted bullion, and two per 
cent more than if he exported cloth." 

Bills of exchange, or the transfer of debts, may take the place 
of money to an almost incalculable extent. The instances thus 
far adduced relate only to foreign bills of exchange, or the ad- 
justment of our trade with other countries. But domestic bills of 
exchange ai-e also drawn to vast amounts, to represent and balance 
the items in our account current with the other States and cities 
of this Union ; they are not, indeed, always called by this name ; 
they generally appear under the fonn and appellation of drafts 
and checks. But they all amount to the same thing; they are 
really hills of exchange, because they are written orders for the 
transfer or sale of debts. They are distinguished from paper 
currency, properly so called, or from bank-bills, by this single 
circumstance, — that a proper bill of exchange, draft, or check, 
must usually be indorsed by each party through whose hands it 
passes, and every person who indorses it incurs a modified re- 
sponsibility for its payment; while bank-bills, as we aU know, 
pass from hand to hand without any indorsement. 
19 



290 THE DISTRIBUTION OF GOLD AND SILVEE: 

And this leads us at once to an explanation of the true nature 
of a bank-bill ; like a bill of exchange, it is simply evidence of a 
debt, which debt is transferred from hand to hand, or exchanged 
for merchandise. The bank which pays out one of its own bills 
simply acknowledges that it is indebted for a specified amount to 
the person who receives it, or to any other person to whom he 
may transfer it ; and it promises to pay this debt on demand in 
specie. • If the circulation of bank-bills in this country should be 
entirely stopped by law, the number and value of bills of ex- 
change and other evidences of debt (less convenient, indeed, than 
bank-bills, because they require indorsement) would be so large- 
ly increased, as to prevent the necessity of importing a much 
larger amount of specie. In England, where the circulation of 
bank-bills of a lower denomination than five pounds sterling, or 
twenty-five dollars, is prohibited, numerously indorsed biUs of ex- 
change formerly circulated to an immense amount as currency. 
They were drawn to as small an amount as ten pounds sterling, 
were used by the country farmers in making their purchases of 
merchandise, and often came into the hands of the person in 
London by whom they were finally payable, with no less than 
forty indorsements upon them. 

And it is a curious circumstance, that these domestic bills 
of exchange are finally paid off, or cancelled, without occasioning 
the transfer of more than an insignificant fraction of money. 
They are made payable by some one of the numerous banking- 
houses in London, and when they approach maturity, they are 
paid into, or left to be collected by, some other banking-house. 
"But the convenience of business," says Mr. Mill, " has given 
birth to an arrangement which makes all the banking-houses of 
the city of London, for certain purposes, virtually one establish- 
meHt. A banker does not send the checks and bills which are 
paid into his banking-house to the banks on which they are 
drawn, and demand money for them. There is a building called 
the Clearing-House, to which every city banker sends, each after- 
noon, all the checks and bills on other bankers which he has 
received during the day, and they are there exchanged for the 
checks on him which have come into the hands of other bankers, 
the balances -only being paid in money. By this contrivance, all 
the business transactions of the city of London during that day, 



SUBSTITUTES FOR MONEY. 291 

and a vast amount besides of country transactions, represented by 
bills which country bankers have drawn upon their London cor- 
respondents," — amounting in the daily aggregate to nearly 15 
millions of dollars, — " are liquidated by payments of money not 
exceeding on the average one million." The process is so 
convenient, and saves the handling of so much money, that 
Clearing- Houses have recently been established in the cities 
of New York and Boston, where the various banks effect their 
settlements with each other by exchanging bank-bills as well 
as checks, and paying off only the balances in cash. In one day 
(March 20, 1857) at the New York Clearing-House, bills and 
checks to the amount of 40 millions were liquidated by the pay- 
ment in specie of less than 1| millions. Even the specie balance 
is now paid only in certificates that the coin has been deposited in 
some bank or in the United States Treasury. 

As the territory of the United States is very extensive, and 
diflferent portions of it have their peculiar staple products, 
the dealings of our merchants in drafts or domestic bills of 
exchange are necessarily very heavy. The extent of the trans- 
actions in these bills must be proportioned to the number and 
value of the commodities which are interchanged. The South 
furnishes cotton, rice, sugar, and tobacco for consumption at the 
North, and for export to foreign countries ; and she needs in 
return the manufactured goods of the North, and the foreign com- 
modities which are imported chiefly into the Northern ports. 
The West sends to the Atlantic States her surplus product of 
breadstuffs, beef, pork, hemp, and lead, and also receives manu- 
factured and foreign goods in exchange. It is easy to see that 
this immense internal traffic takes place in gi-eat part without the 
intervention of money, whether in the form of coin or bank-bills. 
Drafts or domestic bills of exchange are here the great instru- 
ments of commerce, or the circulating medium that facilitates the 
interchange of commodities. The farmer in Illinois or Michigan 
forwards by railroad his wheat and Indian corn to a miller 
at Rochester or a merchant in New York, and draios upon him 
for the value of the consignment at current prices. This draft he 
transfers to his neighbor, a Western merchant, in payment for 
articles of household use and other commodities, with which he 
has been supplied throughout the year ; and the merchant, when 



292 THE DISTRIBUTION OF GOLD AND SILVER: 

he goes to New York to purchase a fresh stock of foreign and 
manufactured goods, gives up this draft to pay for them. The 
whole series of transactions, representing all the complex inter- 
changes of commodities between the East and the West, might be 
completed without the intervention of a bank-bill or a piece of 
coin in any part of the business, except perhaps to "make 
change," or settle a fractional part of an account. 

The business of the Southern planter is managed nearly in the 
same way : though the larger part of his produce is shipped to a 
foreign market, the transaction is settled for him by a draft on a 
merchant in New York or New Orleans ; and this draft, after its 
acceptance, can be directly used in the purchase of commodities. 
It usually commands a small premium, or is worth more than 
cash ; for the currency of the neighborhood, being supplied 
by local banks, is not available for purchases at a distance, 
and the transportation of specie is burdensome and expensive. 
A draft is really the safest and most convenient form of money ; 
for as it is indorsed over from one person to another, the danger 
of its value being lost or stolen is entirely obviated. In this com- 
merce of the different States and other portions of the country 
with each other, as in international trade, commodities are reaUy 
purchased with commodities, and the amount of sales must, in 
the long run, equal the amount of pvirchases; otherwise, the 
course of exchange would turn against the State or district which 
bought more than it sold, and the deficiency would have to 
be made up first by a remittance in specie, and afterwards by 
diminishing purchases and increasing sales. 

It will be observed that I have thus far hardly entered into 
any consideration of proper bank currency or of bank deposits, 
viewed as substitutes for gold and silver coin ; this topic, from its 
extent and importance, must be reserved for another chapter. 
Yet we have seen that the largest operations of domestic and 
foreign trade are carried on with the intervention of very little 
money ; that the most important exchanges are effected without 
any transfer of the precious metals ; and we have already abun- 
dant reason to believe that, in these modern times, the proper 
sphere of money is in retail transactions, and in answering fre- 
quent petty demands. We thus gain a more correct idea of 
the comparatively limited functions of money, which common 



SUBSTITUTES FOR MONEY. 293 

persons are led grossly to exaggerate, merely because, at any 
one time and place, it is a common measure of value and a 
universal denomination of account. All wealth, all commodities, 
are estimated in dollars, francs, pounds sterling, and the like; 
and it is by the aid of such estimates that all exchanges are made. 
Thus, the idea of money aids us, when the reality is seldom 
employed. As pounds sterling were a universal denomination 
of account for a long period, during which there was no such coin 
as a pound sterling in existence, so the idea, or abstract con- 
ception, of numerical values expressed in coin would be a con- 
venient, even an essential, implement or contrivance in mercantile 
transactions, though all exchanges should be made by direct 
barter of one commodity for another. Without such a contriv- 
ance, the merchant could not keep his books of record intelli- 
gibly, or pi'eserve his accounts with individuals in his large and 
complicated business. Money is even now only a hypothetical 
or abstract medium of exchange in all the larger transactions 
of commerce. 

We can do without money, therefore, as a medium of exchange, 
and can even barter commodities for other commodities without 
the use of any medium. But we cannot do without money as a 
common standard, or measure, of value. A measure must be homo- 
geneous with the thing measured ; as that which measures length 
or 'capacity must itself possess length or capacity, so that which 
measures value must have value in itself, or intrinsic value. But 
a bank-note or a bill of exchange has no value in itself; intrinsi- 
cally it is worthless. It is a mere representative of value ; how 
much value it thus represents must have been determined ante- 
cedently by reference to some real unit or standard of measm-e- 
ment. By the general consent of nations, gold and silver, one or 
both, have been adopted as this common measure or standard, and 
nothing else will be universally accepted as such. All commerce, 
all credit, is built upon this conventional arrangement ; neither 
can exist without an accurate determination of the values in- 
volved, and such detennination is possible only by reference to 
a common standard. Any one nation, it is true, may do what the 
United States have done for the last ten years ; it may discard 
the common or universally recognized standard, and adopt an 
arbitrary one of its own. In all internal transactions, it may use 



294 THE DECLINE IN THE VALUE OF MONEY. 

the paper dollar as a substitute for the gold or silver dollar. But 
it cannot compel foreigners to accept this arbitrary standard, 
which, in truth, is no standard at all, because its value is subject 
to serious and frequently recurrent changes. In all its dealings 
with other nations, it must recognize the common measure, — the 
number of grains of pure gold or pure silver that constitute the 
dollar, the pound sterling, the franc, or the florin. Hence there 
can be no substitute for coined money in another of its offices, — 
the final determination and payment of the balance that is struck 
of the long account current of trade with any other nation taken 
singly, or with all the nations of the earth taken together. 
Foreign remittances must be of actual, and not merely conven- 
tional, values ; they must consist either of commodities or of specie. 

It is now generally admitted that a great revolution is taking 
place in the commercial and monetary world, caused by a consider- 
able decline in the value of the two precious metals, — a revolution 
such as has not occurred for two centuries, and of which there is 
biit one parallel in history. Silver and gold, after maintaining a 
nearly uniform value for a very long period, are now, owing to the 
increased quantity of them annually obtained from the mines, 
changing not only their relation to each other, but their value as 
compared with that of all other commodities. This change is not 
to be a merely nominal one. It might seem, indeed, that, as the 
precious metals are a universal measure of value, any depreciation 
of them would cause only a general rise of prices, all commodities 
being affected in the same ratio, so that their relation to each 
other would remain unaltered. This is true ; such a change would 
not benefit or injure any one. But all stipulations for the pay- 
ment of money at a future day will be really affected to the full 
extent of the change which the precious metals may imdergo while 
the contract is outstanding. A revolution which will considerably 
lessen the burdensomeness of all public and private debts, but 
which will injure creditors as much as it will benefit debtors, may 
well be deemed a momentous one. 

The first points to be considered are, the probable extent of the 
depreciation, and the time within which it may be expected. Let 
us first consider the effect produced in Europe by the great sup- 
plies obtained from the American mines in the sixteenth and 
seventeenth centuries. 



THE DECLINE IN THE VALUE OF MONEY. 295 

We do uot need to know the whole amount of gold and silver 
actually in use in the world, either as coin or plate, before the dis- 
covery of America. It is a well-ascertained principle, that the per- 
manent or average value of a commodity depends, not on the 
larger or smaller stock of it already in being, but on the average 
Cost of its Production. If a pound of iron is worth only one- 
thousandth part as much as a pound of silver, it is not because 
there are a thousand times as much iron now in use as silver, but 
because it requires a thousand times as much labor to raise an ad- 
ditional pound of silver from the mines as it does a pound of iron. 
If the stock already in use be ever so large, the value of it cannot 
•permanently fall below the Cost of Production ; for as the labor of 
obtaining more would not be remunerated, no more would be pro- 
duced ; and the constant consumption would steadily diminish the 
stock, till the value of what remained would rise high enough to 
pay the laborer for the effort of procuring a fresh supply. On the 
other hand, if the stock is ever so small, no one will pay more for 
any portion of it than it would cost him to raise or manufacture 
the article for himself. The steady average value, then, the point 
about which the Price oscillates, never departing from it far in 
either direction, is the Cost of Production ; and so long as the 
demand remains the same, this Cost will be nearly in inverse ratio 
to the quantity annually produced. 

Down to the time of Columbus, the average annual supply of the 
two precious metals certainly did not exceed three millions of dol- 
lars. How much was this increased by the supplies from America 
during the sixteenth and seventeenth centuries'? Humboldt is 
here the only authority generally relied upon ; and he tells us that 
the annual supplies of the precious metals obtained from America 
were as follows. 

America discovered in 1492. ?„''""Lp^tt' 

on an average. 

From 1492 to 1500 250,000 

" 1500 to 1545 3,000,000 

" 1545 to 1600 11,000,000 

" IGOO to 1700 16,000,000 

" 1700 to 1750 22,500,000 

" 1750 to 1803 35,300,000 

Hence it appears, if we suppose the Old World continued to 
furnish as much as before, that, before 1550, the supplies from 
America had doubled the annual product. Before 1600, they 



296 THE DECLINE IN THE VALUE OF MONEY. 

rendered it nearly five times as large. In the seventeenth cen- 
tury, it became over six times, and in the eighteenth over- eleven 
times, larger than it was before 1500. The great increase in 
the latter half of the sixteenth century was owing to the discovery 
of the mines of Potosi, which were first systematically worked in 
1545. 

How great and how rapid a depreciation of the value of money 
was caused by this vast increase of the supply 1 Here, again, the 
means for forming an opinion are imperfect, being chiefly an exten- 
sive and laborious comparison of the prices, at difierent periods, 
of certain leading commodities, which are in uniform and perpetual 
demand. The staple articles of food, such as grain and meat, are 
the best for this purpose, as it may be presumed that they are not 
often produced in larger quantities than are wanted, and as nearly 
the same amount of labor is required for the production of a given 
quantity of them in one century as in another. If a genuine 
record can be obtained of the prices actually paid, at one place, for 
such articles, for a long series of years, the variations, if any, in the 
value of the precious metals during those years, may be deduced 
from it ; allowance being made, of course, for any alterations of the 
quantity of pure metal passing under the same denomination of 
coin, and for the state of the coinage, whether worn and clipped 
or fresh and perfect. Such a record is found in the accounts of 
Eton College, and in the lists of prices collected by Bishop Fleet- 
wood and M. Dupre de St. Maur. The conclusions deduced by 
various writers from these accounts do not agree very well ; but 
the variations do not materially affect the result for the purpose 
which we now have in view. We select the computations made 
by Adam Smith, as they were made with great care and knowl- 
edge of the subject, and have been generally accepted by later 
writers. 

Adam Smith says the American mines do not seem to have 
produced any effect upon prices till after 1570, though the mines 
of Potosi had then been actively worked for a quarter of a cen- 
tury. Between 1595 and 1620, silver fell to about one third of 
its former value; and about 1636, it had fallen to one foiu*th 
part of that value, where it has remained with little variation 
almost to the present day. Before 1570, a quarter (eight bushels) 
of wheat of middle quality was sold in England, on an average of 



THE DECLINE IN THE VALUE OF MONEY. 297 

a long period of years, for about two ounces of pure silver ; about 
1600, (still taking an average of many years, so that the very 
good and very bad crops may offset each other,) the price had 
advanced to a little over six ounces; about 1636, it had risen to 
nearly eight ounces. The average value of a quarter of wheat in 
England, from the repeal of the Corn Laws up to 1852, did not 
vary much from forty-three shillings, which contain almost exactly 
eight ounces of pure silver. 

Comparing these results with the table already given of the 
annual product of the precious metals, we find, — 1. That dou- 
bling the animal product of money for half a century had no effect 
on its value, or did not raise prices at all; 2. That malcing the 
annual pi'oduct five times as great had no effect upon its value 
for 25 years, after which time, however, the value gradually fell 
to one third of what it had been ; 3. That about 36 years after the 
annual product had become six times as great, the value had fallen 
to one fourth of its former amount; 4. That from 1636 to 1848, 
or 212 years, the value of the precious metals xmderwent no ma- 
terial alteration, though meamvhile the annual supply of them had 
become eleven or tivelve times greater than what it had been before the 
discovery of America. 

These facts satisfactorily support two general conclusions, — 1. 
That a very considerable increase of the supply may take place 
without any perceptible change in the value ; 2. That the altera- 
tion, when it does occur, is very slow and gradual, the variation 
from one year to another being hardly perceptible. 

Let us now see how gi-eat have been the changes in the annual 
supply during the present century. About the year 1800, the 
annual supply of gold amounted to $ 12,648,000, and of silver to 
$ 36,289,008 ; making a total of % 48,937,008. Soon after 1810, 
the revolutionary troubles in Spanish America, and the proscrip- 
tion of the old Spanish families to whom the mines chiefly be- 
longed, caused the works in many cases to be abandoned, and 
there was a great falling off of the product. But after 1834, the 
gold product of the Russian mines and washings began to swell 
the amount very rapidly; and in 1847, it had raised the annual 
supply from all parts of the world to $ 67,000,000, making it 
nearly one third larger than it had been in 1800. 

But what was this to the astounding results produced by the dis- 



298 THE DECLINE IN THE VALUE OF MONEY. 

coveiy of the Californian and Australian gold washings 1 The gold 
obtained in Australia alone, in 1852, was estimated at 330,000 
pounds troy ; and the supply from California that year is be- 
lieved to have been 252,000 pounds troy. It has turned out, 
indeed, that 1852 was far the most productive year, and there 
was a considerable falling off" the next year, especially in Australia. 
Still, it is safe to estimate the total product of these two coun- 
tries, in 1854, at 350,000 pounds; and if the supply from Russia 
and other sources be added, the aggregate for that year is near- 
ly 482,000 pounds, or about $ 119,536,000. By a curious coinci- 
dence, the annual supply of silver from the Mexican and South 
American mines was largely augmented after 1840, the total 
for the whole world being one third larger in 1850 than it was 
five years earlier ; the aggregate amount mined in 1850 was near- 
ly $ 44,000,000. Putting these two sums together, we have the 
value of gold and silver obtained from the mines in 1854 equal to 
$163,536,000. 

The results now obtained may be put into a tabular form for 
the purposes of comparison. 

Annual product of the 
two precious metals. 

From 1800 to 1810 $49,000,000 

" 1810 to 1836 30J000,000 

1847 67,000,000 

1854 163,536,000 

Unless new gold-fields should be discovered, however, of which, 
there seems little probability at present, it is certain that the 
maximum supply was obtained in 1852, and that there has since 
been a very considerable falling off. In 1855, the supply was 
probably not more than half as great as in 1852. The falling off 
was even more sudden and marked in Australia than in Cali- 
fornia. In respect to silver, on the other hand, the supply is 
steadily but slowly on the increase, the most cautious estimates 
making the increase at least 21 per cent a year. The annual 
product of this metal was estimated in 1856 at very nearly 
$50,000,000, the chief portion of the increase being from Mexico 
and Chili. Since 1860, Nevada alone has added 16 millions 
a year to this sum. 

Silver is obtained by mining, and the veins which are worked 
are sometimes found to grow richer as they are followed into the 



THE DECLINE IN THE VALUE OF MONEY. 299 

bowels of the earth. The expense of working them, indeed, 
increases as we descend ; but the steadily increasing product 
is often an offset for this enlarged cost. Gold, on the other hand, 
is generally obtained by washing from a sujDerficial deposit of 
gravel and sand. It is chiefly found in what the geologists call 
" the drift," and in a stratum of it of no gi-eat thickness. Being 
thus spread out over a great extent of ground, and lying at or 
near the surface, almost any number of persons can be engaged 
in obtaining it without impeding each other's operations. If also, 
as is the case in California and Australia, the land in the au- 
riferous district is, in the main, open to all comers, as the 
Great Bank is to all fishermen, then, large as the district may 
be, it is soon covered with gold-hunters. The most promising 
localities are quickly exhausted, and every year the labor of 
gathering the shining dust increases, and the returns diminish. 
The experience of California is conclusive on this point. The 
solid rock, though it be tough quartz, in which the gold spangles 
now found in the drift were originally embedded, is now crushed 
and ground by heavy machinery, and a supply of auriferous sand 
and gravel is thus obtained by artificial means, in addition to that 
which natural agencies have spread out over the surface. We may 
not anticipate, then, that the gold-bearing districts will ever 
be completeli/ exhausted. Still, two processes must always be 
more laborious and expensive than one, and the ground will 
no longer be open to every comer. When the business is all 
reduced to pounding up primary or metamorphic rocks with 
machines, and to washing gravel for the second time, it is 
reasonable to expect, that, although capitalists may get a fair 
return for their enterprise, the annual supply of gold will not 
be more than half of what it was in 1854. 

Regarding the enlarged supplies of silver from Mexico and 
Nevada, together with the fact that we have now three great 
gold-bearing regions to depend upon, so distant from each other 
as Russia, California, and Australia, it will not be deemed in- 
cautious to anticipate that the annual supply of the two 2^'>^e<:ious 
metals will not fall heloio a hundred and twenty millions of dol- 
lars for many years; and that, before 1900, this supply will de- 
preciate money to one half of what was its value before 1850. 

In respect to the relative amounts by weight of the two pre- 



300 THE DECLINE IN THE VALUE OF MONEY. 

cious metals, it appears from the statistics already given, that, at 
the beginning of the present century, the annual product of gold 
was to that of silver as 1 to 43. The following table exhibits in 
one view the sudden changes to which the relative quantities of 
the two metals have been subjected, the figures indicating the 
weight in pounds troy. 





1800. 


1845, 


1852. 


1854. 


Silver 


2,337,300 


2,183,500 


2,958,296 


3,106,210 


Gold 


54,000 


129,250 


717,950 


482,000 


Ratio 


1 to 43 


1 toir 


1 to4 


lto6i 



In the sixteenth and seventeenth centuries, while the Mexican 
and South American mines were pouring out their treasures of 
silver, gold rose from a comparative value only ten times as 
great as that of silver to that which it had in 1848, of nearly 
16 to 1. In 1854, then, it appeared reasonable to believe that the 
sudden and great increase in the annual product of gold, the 
annual product of silver being then supposed to be nearly station- 
ary, would carry back the relative value of the two metals to its 
former point of 10 to 1, and perhaps lower still. It was even 
thought that the rise in the comparative value of silver would be 
a tolerably exact measure of the depreciation of gold. Acting 
under this expectation, the government of Holland demonetized 
gold, and made silver the standard of value, thinking thereby to 
avoid the threatened decline in the value of money. But as the 
annual supply of gold rapidly fell off, while that of silver steadily 
increased, it appears probable that the relative value of the two 
will not be much affected, while there will be a regular progres- 
sive diminution in the value of both. 

Very good reasons have been given why the discovery of the 
American mines, in the sixteenth century, and the influx into the 
market of eleven times as much of the precious metals as before, 
did not reduce them to one eleventh, but only to one fourth, of 
their former value ; and why, when the ratio of the quantity 
of silver to that of gold was as 45 to 1, the ratio of their values 
was only as 1 to 15. As already observed, in commerce and the 
arts, chiefly on account of its inferior cost, silver has been far 
more generally in use than gold. It has supplied much the 
larger portion of the currency of all nations. With some nations 
of the East, — the Chinese, for instance, — gold is hardly used at 



THE DECLINE IN THE VALUE OF MONEY. 301 

all for this purpose. Silver must always be used for the smaller 
pieces of money, at least until gold has fallen much below its 
present value. Our gold one-dollar piece is inconveniently small, 
and will not probably come into general circulation. 

The general principle is, that the value of money falls in pre- 
cisely the same ratio in which its quantity is increased. If the 
whole money in circulation should be doubled, prices would be 
doubled ; if it was only increased one fourth, prices would rise one 
fourth. The principle, however, holds good only under the sup- 
position that the quantity of commodities, the number of ex- 
changes, and the number of people having occasion to effect 
exchanges, remain unaltered. Otherwise, if there be an increase 
in either of these respects, the quantity of money being un- 
changed, the value of that money will rise ; or if money is increas- 
ing, the increase in these other respects may neutralize, wholly or 
in part, the depreciation of that money. This was the case after 
the discovery of America. There was an immense enlargement 
of commerce and manufactures at that period, and a great im- 
provement in the modes of living. The discovery of America 
itself, and of the passage round the Cape of Good Hope, and the 
colonization of the West by Europeans, greatly enlarged the de- 
mand for money. Before 1500, vastly the larger portion of the 
people were engaged in agriculture ; they raised most of the 
articles which they needed by their own labor, and obtained many 
others by direct barter. Afterwards, many were diverted into 
commercial and manufacturing pursuits, and the consequent Di- 
vision of Labor greatly increased the number of proper mercantile 
exchanges. The middle classes now first came into notice as a 
distinct power in the state. As wealth advanced, luxury grew 
apace. The actual consumption of the precious metals, by abra- 
sion of the coin, the wear of plate, lace, and trinkets, by plating 
and gilding, and by losses through shipwreck or fire, became 
considerable. 

It is easy to perceive why, under such circumstances, the supply 
having become eleven times as great, the value fell only to one 
fourth of Avhat it had been. On the other hand, why the value 
did not advance again from 1750 to 1830, when the supply was 
nearly stationary, though commerce, wealth, and luxury were still 
rapidly increasing, is a point which requires explanation. But as 



302 THE DECLINE IN THE VALUE OF MONEY. 

society advances, means are discovered for economizing the use of 
money. The vast extension of credit ; the establishment of banks, 
and especially of Savings' Banks, which bring together and keep 
in active use a vast number of small sums, which would otherwise 
be hoarded or lie dormant in the hands of individuals; the cir- 
culation of bank-notes, checks, and bills of exchange, which 
perform nearly all the functions of money; and, more than all, 
the introduction of accounts current among traders, by which 
purchases are set off against sales, and commodities are thus 
virtually bartered for commodities, money being needed only at 
the final settlement, and then only to a trifling amount, — all, 
as we have seen, are expedients for completing exchanges with- 
out the actual transfer of coin. Only the rapidly extended 
use of these expedients could have prevented a considerable 
rise in the value of money, and consequent fall of prices, dur- 
ing the period when the annual supply of the precious metals 
was nearly stationary, and the operations of commerce greatly 
enlai'ged. 

Is it probable that the effect of the present vastly increased 
supply of the precious metals will be, to any considerable ex- 
tent, retarded or neutralized by an increased demand for money, 
through the growth of luxury and trade*? We see no circum- 
stances likely to produce this result, except the colonization of 
the gold-bearing regions themselves ; and even this can have 
comparatively little influence. For some years, at least, Califor- 
nia and Australia must use chiefly a hard-money currency, while 
large amounts of bullion, as I have already remarked, will be 
in transitu, — wandering about, as it were, from one country to 
another, to find where they will be of most value, — before they 
pass into active circulation as currency. But these circumstances 
can impede the result only for a few years ; they cannot materi- 
ally lessen or weaken it. Perfect as the machinery of trade now 
is, and perfectly as it is understood, no country which is colonized 
by commercial nations can remain far behind the mother land in 
the use of money-saving expedients. In respect also to the use 
of the precious metals for articles of luxury and ostentation, M. 
Chevalier finds reason to believe that it is rather diminishing than 
increasing. The official returns, both in England and France, 
show that there was a larger manufacture of gold and silver plate 



THE DECLINE IN THE VALUE OF MONEY. 303 

in those countries before 1830 than there ever has been since. 
" The luxury of our days," says Chevalier, " has democratic 
features ; it is very calculating and economical. It is lavish of 
gilding and silvering, but requires few massive articles in silver, 
and still fewer in gold." It seems most probable, then, that the 
general principle will hold, that the value of money will fall in 
the same ratio in which the average annual supply of it is in- 
creased. 

We come, then, to the main question, — Is there anything in 
the prospect of a great decline in the value of money to create seri- 
ous uneasiness and alai-m ] We suppose that the decline will be 
gradual, that it will be spread over many years, that at least half 
a century must elapse before it can be completed. There will be a 
rise in the prices of all commodities, with a corresponding increase 
in wages and salaries. Labor will be higher paid, both because 
the articles it produces will have a greater nominal value, and be- 
cause the cost of living will be greater, so that, if wages and sala- 
ries did not rise, the labor could not be had. The rise of prices, 
being general, will consequently be only nominal ; that is, one 
commodity may be bartered for another on just the same terms 
'as before. If, when flour is five dollars a barrel, it takes five bar- 
rels of flour to buy one coat, after money has fallen to one half of 
its value, the coat can still be had for five baiTels of flour; but it 
will then be said to be worth fifty dollars, and the flour to be ten 
dollars a barrel, instead of five. In this narrow view of the sub- 
ject, therefore, or so far as this effect extends, no one will be di- 
rectly benefited, and no one directly injured. 

With respect to outstanding obligations, or contracts to deliver 
money at a future day, the case will be different. If I borrow one 
hundred dollars at a time when that sum will purchase twenty 
ban-els of flour, or an equivalent amount of other commodities, 
and am not called upon to repay it till money has so far fallen in 
value that the sum will buy only ten barrels, the debt is i-eally 
cancelled by returning only one half of the value which was bor- 
rowed. To this extent, therefore, every one will be benefited so 
far as he owes money, and will be injured so far as he has money 
to receive. But in either case, he -will be affected only by the 
amount of the depreciation which takes place in the interval be- 
tween the contraction of the debt and its payment. If fifty years 



304 THE DECLINE IN THE VALUE OF MONEY. 

elapse before the depreciation is completed, and if it take place 
uniformly, or at the rate only of one or two per cent a year, then 
all promises to pay which have not more than a year to run will be 
affected to the extent only of one or two per cent. But, in the or- 
dinary course of business, vastly the larger number of contracts are 
completed withfn the year ; they will not be so much affected by 
the general decline in the value of money as they often have been 
by common fluctuations in the rate of interest, and by changes 
in the price of particular commodities. Money is often borrowed 
by merchants when the current rate of interest does not exceed 
five per cent a year, and the time of repaying it has come when 
it could with difficulty be had at one per cent a month. We may 
say generally, then, that the common transactions of business will 
not be sensibly affected by the great change which is in prospect. 

But all fixed money payments having many years to run will be 
seriously affected by the coming alteration ; that portion of them 
which extend over half a century will experience the full effect of 
it. All government stocks, and other stocks yielding a fixed rate 
of interest, and not bearing any obligation to be paid off" in a few 
years ; all bank-stock, and other permanent investments of money 
yielding income only under the form of interest ; and all property 
let on long leases at a fixed annual rent must decline in value with 
the money which they represent. Such stocks, and the property 
also, if the lease be a perpetual one, when the depreciation is com- 
plete, will possess only half their present relative value. The nomi- 
nal income yielded by them will remain the same, but it will only 
purchase half as many commodities as before. There will be no 
actual loss to the communitj^, for what one loses another gains. 
The tax-payers, for instance, will gain just as much as the holders 
of stock in the national debt will lose. As the depreciation goes 
on, taxation may be extended pari passu, without throwing any 
additional burden upon the community; and a sinking-fund, formed 
out of the surplus thus obtained, would pay off" the national debt 
in less than one generation. As such stocks, moreover, are trans- 
ferable, and frequently pass from hand to hand, the total loss up- 
on any portion of them will seldom fall on one person ; it will be 
divided among many, and thus be distributed among the wealth- 
ier portion of the community, who, profiting in their capacity as 
tax-payers by the depreciation which occasions this loss, will have 



THE DECLINE IN THE VALUE OF MONEY. 305 

no great reason to complain. Life-annuitants, persons who havo 
insured their lives, mortgagees on long periods, and those who 
have let property on permanent or long leases, will be almost the 
only class compelled to bear the loss without any direct compen- 
sation or means of escape. The funds of public institutions and of 
individuals which exist in the form of floating capital, or what is 
usually called " money at interest," will, of course, suffer the full 
effect of the depreciation ; but, as the ownership of real estate is 
commonly connected with the possession of such funds, and as the 
value of real estate will rise even in a higher ratio than the prices 
of commodities, owing to the general eagerness. to secure the only 
form of permanent investment which will not be affected by the 
decline in the value of money, the loss in this case will not gen- 
erally be without compensation. 

The rates of interest cannot be directly altered by the change. 
If gold sinks to half of its present value, the $100 of principal,' 
and the $6 of annual interest for it, will be affected in precisely 
the same ratio ; both sums will purchase but half as much of any 
given commodity as can now be obtained for them. Being affected 
in the same manner, and to the same degree, their relation to 
each other will remain unaltered. Indirectly, however, a very 
gradual decline in the value of money will produce a slight dimi- 
nution in the rates of interest. The great addition to the stock of 
the precious metals will appear, at first, in the form of floating cap- 
ital seeking investment ; it will swell the specie reserves of the 
banks, making them eager to extend the circulation of their notes. 
Thus, until the prices of commodities begin to be sensibly affected, 
there will be more lenders than borrowers, and money will be 
offered at a lower interest. It was so in 1852. In consequence 
of the influx of gold, the specie reserves of the banks were distend- 
ed to repletion. The Bank of England had the enormoxis sum of 
twenty-two millions sterling in its vaults, or nearly 110 millions of 
dollars. It consequently reduced the rate of interest, first to 2| 
and then to 2 per cent a year, — the lowest rate at which it had 
ever discounted bills. 

As the spirit of speculation has usually been rife when but slight 
temptation was offered, it may seem strange that it should havo 
shown itself so dull when there was a moral certainty that there' 
would soon be a general rise of prices. But the prospect of a geu- 

20 



306 THE DECLINE IN THE VALUE OF MONEY. 

eral and gradual rise of prices does not tempt men into hazardous 
enterprises so much as the chance of a sudden and great enhance- 
ment of the price of one commodity. The report of a war with 
China may double or triple the price of tea in a month ; or a ru- 
mor of the potato-rot and a failure of the crops in England may 
create a fever almost at once in the flour-market here in America. 
But a gradual enhancement in the money value of all commodities 
does not quickly induce people to purchase largely on borrowed 
capital. There may be brief and violent fluctuations in the rela- 
tive value of particular commodities, while the great movement is 
silently going on which slowly enhances the value of all. It is 
conceivable, and even probable, that one effect of the abundance 
of capital seeking investment, and the consequent diminution of the 
rate of interest, wiU be to lower the prices of many commodities, 
instead of raising them, because these circumstances aid and stim- 
ulate production. More cotton will be spun, because it will be 
more easy to obtain capital wherewith to build manufactories and 
keep them in operation. 

Still, the loan of capital could not be so generally offered at very 
low rates of interest without producing, sooner or later, its proper 
result, — a disposition to speculate and a general inflation of prices. 
This effect began to be manifest towards the close of 1852, and be- 
came very conspicuous the following years. Commodities gene- 
rally rose in price, to the extent, on an average, probably of 15 or 
20 per cent beyond what was obtained for them in 1850 ; and in 
the case of breadstuff's and some other articles of provision, a partial 
failure of the crops in Europe in 1854 made the enhancement of 
price much greater. As a necessary consequence of the increased 
cost of living which was thus produced, there was a general rise of 
wages and salaries, amounting to at least 10 per cent. These re- 
sults were attended by considerable speculation, since loans could 
be easily obtained, and there is always a strong temptation to buy 
on a rising market. A reaction followed in the United States in 
1857, which soon extended to England, France, and Germany. 
Many persons had traded beyond their means, and therefore found 
great difficulty in meeting their engagements. The rate of inter- 
est rose to its highest point, and loans were difl&cult to be had on 
any terms. In short, there were all the features of a commercial 
crisis, except a faU of prices, which was prevented by the steady 



THE DECLINE IN THE VALUE OF MONEY. 307 

influx of gold, diminished in amount, it is true, but still sufficient 
to maintain prices and wages at the elevation which they had 
reached. It became manifest, then, that this was a permanent ele- 
vation ; having withstood a general pressure in the loan-market, 
which continued for an unusual period and with extraordinary se- 
verity, there is no I'eason to believe that it will give way now that 
ease and prosperity have returned. No one expects prices to 
retvu-n to the level at which they were in 1850 ; money was de- 
preciated in value, during the next ten years, about fifteen per 
cent. 

Professor W. S. Jevons attempted to ascertain how much money 
has recently declined in value by comparing the average prices in 
the London market of 39 chief commodities during the six yeara 
1845-50 with their average prices from 1860 to 1863. The com- 
modities were well selected for this purpose, as they comprised 
all kinds of grain and the leading products of agricultm-e ; such 
fibrous materials as wool, silk, flax, and cotton (before the war of 
the Rebellion had affected its value) ; the principal metals ; and 
such animal and vegetable products as tallow, hides, and timber. 
He found that these commodities had, on an average, risen in 
price 16.2 per cent between the two periods, thus showing a de- 
preciation of gold equal to 14 per cent. He also compared the 
prices, diu-ing the same two periods, of 79 other commodities 
of less importance, and found that the average of the whole had 
risen over 10 — thus indicating that gold had depreciated more 
than 9 — per cent. He also observed, that although the years 
1860-62 formed a period of general depression of trade result- 
ing from the great crisis of 1857, prices were far from having 
fallen to their old level before that crisis. The comparison, there- 
fore, is a fair one, and the conclusion from it is very cautiously 
stated, that the depreciation of gold, as far back as 1863, must 
have been at least 9, and very probably reached 15, per cent. 
As the relative value of the two precious metals has not altered 
since 1850, we must infer that silver has fallen in value as much 
as gold. This result was to be expected from the great produc- 
tiveness of the silver mines in Nevada, first discovered in 1859, 
which have yielded annually about 16 millions of dollars in that 
metal for several years. 

The experience which we have now had enables us to predict 



308 THE DECLINE IN THE VALUE OF MONEY. 

with some confidence the future course of the depreciation in the 
value of money. It will not stop here ; the continued influx of at 
least 120 millions of dollars a year from the silver mines and gold 
deposits must soon raise the prices of commodities another 15 or 
20 per cent. As further supplies are received from California and 
Australia, the specie reserves of the banks will again be distended, 
the rate of interest will again be reduced, loans and discounts will 
be freely offered, and, as a necessary consequence of the larger 
amount of money thus thrown into the market, prices will rise 
still higher, or, what is the same thing, the value of money will 
be still further depreciated. That a speculating fever should also 
ensue, many persons being encouraged by this abundance of 
money and enhancement of price to make purchases beyond their 
capital, is a natural, but not a necessary, consequence of this 
alteration of values. It is evident that the change might take 
place by a steady and gradual process, each annual receipt of the 
precious metals from the mines operating upon the market to 
raise prices to an extent almost too slight to be appreciated ; 
if so, there would not be even a fluctuation in the rate of interest 
to indicate the change which is going on. But it is more probable 
that the revolution will not be thus uniform in its progress, but 
that it will advance, so to speak, by hitches and starts, a single 
year being marked by a considerable rise in prices, which will be 
followed by two or three years of seeming quiescence, and then 
another rise will ensue. 

One reason why money does not sink in value slowly and 
uniformly, but by starts, is to be found in the time which 
is required for eq\ializing prices throughout the world. After they 
have risen in the chief commercial countries, such as England, 
France, and the United States, the effect must be transmitted to 
the East, to British India and China. The price of opium, tea, 
silks, and other Eastern products, must also rise, and large 
amounts of gold and silver will be transmitted to pay for these 
commodities at their enhanced valuation. The East has always 
required more metallic currency in proportion to the extent of 
her commerce than the West, as it has fewer banks and other 
expedients for economizing the use of money. 

One cause, perhaps, why the change in the relative value of 
the two precious metals has not become more manifest, may be 



THE DECLINE IN THE VALUE OF MONEY. 309 

found in the change which has taken place in the currency of 
France. The circulation in that country was almost exclusively 
metallic, as the only bank-bills were of a very high denomination ; 
and, before 1850, it consisted for the most part of silver, gold bear- 
ing an agio of about seven in a thousand, and therefore not coming 
into general \ise. But the influx of gold from Australia and Cali- 
fornia reversed this state of things. The French mint coined a 
very large amount of gold during the last five years, which entered 
rapidly into circulation, displacing an equivalent amount of silver 
coin, which was melted up and sent abroad. It is estimated, by 
well-informed French and English writers, that the silver thus set 
free in France alone amounted to over sixty millions of dollars. 

When it was expected that silver would rise in value relatively, 
just as fast as gold depreciated, the question arose, — and it was a 
very important one, — how the alteration in the coinage should be 
made. Should it be by adding to the quantity of gold, or by di- 
minishing the quantity of silver, which now passes for a dollar 1 
If the former course were adopted, the value of money would de- 
cline only in proportion to the depreciation of silver, the greater 
depreciation in the value of gold being obviated by the increased 
quantity of it which passed under the old denomination. If the 
latter course were preferred, money would fall in value as rapidly 
as the worth of gold depreciated. In either case, several suc- 
cessive changes of the mint regulations would be necessarj\ 

The question which we are here considering is not one of mere 
convenience or expediency ; we must also see what abstract justice 
requires in all dealings between debtors and creditors. Those 
who were in favor of increasing the quantity of gold, rather than 
of lessening the quantity of silver, which now passes for a dollar, 
might argue very plausibly, that a debt ought to be cancelled only 
by the payment of money equal in value to that in which it was 
contracted. If I have borrowed one thousand silver dollars, or 
something which could readily be exchanged for one thousand 
silver dollars, I ought not to be allowed to cancel the debt by 
paying one thousand gold dollars, after gold has fallen to one half 
of the value which it had when I obtained the loan. 

This argument is plausible, but it is insufficient. All mercan- 
tile contracts must be construed literally, or must have a specific 
performance. The law never undertakes to guard either party 



310 THE DECLINE IN THE VALUE OF MONEY. 

against the evil consequences to himself of a change of values 
which he has not foreseen. Such changes are very frequent in 
mercantile transactions, and the maxim, caveat emptor, applies to 
them all. If I pay one thousand dollars now for one hundred 
barrels of flour to be delivered three months hence, and if the 
price of flour falls meanwhile to eight dollars a barrel, I must not 
expect that one fifth of the purchase-money will be paid back to 
me ; and if the price, on the other hand, rises to twelve dollars, 
the seller cannot require me to make up the difference. Each 
party must bear the consequences of his bargain and of his own 
want of foresight. In like manner, if a landholder leases an es- 
tate for twenty years, at an annual rent of five hundred dollars, 
he cannot rightfully demand compensation, nor can the lessee ask 
an abatement, if, in the course of those twenty years, the value 
of the dollars should be altered by circumstances over which 
neither party had any control. 

According to the state of the law before 1853, when we suppose 
the lease was made, the annual payment was to be either five hun- 
dred times 23.22 grains of pure gold, or five hvmdred times 371.25 
grains of pure silver. It was a part of the contract, that the lessee 
should have the option of paying his rent in either of these forms, 
the two metals in these proportions being both legal tender. It is 
the misfortune of the lessor, but certainly not the fault of the les- 
see, if, when the rent becomes due, the 23.22 grains of pure gold 
will no longer purchase so many commodities as before. The lat- 
ter cannot, therefore, be obliged to pay silver; for he bargained 
to pay gold, if he saw fit. 

Apart from all considerations of expediency, then, it would be 
an obvious violation of justice, in any country where a double 
standard exists, to seek, by altering the regulations of the mint, to 
prevent the present and the expected depreciation in the value of 
gold from affecting the value of all money to the full extent of 
such depreciation. In other words, it would be wrong to alter the 
law on any other principle than that on which it was altered in 
1853. 

There are some reasons why a decline in the value of money, 
such as is now taking place, should be regarded as a source of 
prosperity to this country. As has been mentioned, those coun- 
tries which have a large national debt are most likely to be bene- 



BANKS AND BANK CURRENCY. 311 

fited by the change. The burden of taxation will be essentially 
diminished, while the loss sustained by the fund-holders will fall on 
shoulders that ai-e most capable of bearing it, and will also be dis- 
tributed among many, and over a long period of yeai-s, the frequent 
changes in the ownership of the stocks, moreover, tending to render 
their real depreciation almost imperceptible. Our national debt 
now (1870) exceeds 2,400 millions of dollars, of which about 1,000 
millions are due to foreigners. The aggregate indebtedness to for- 
eigners, including National, State, and municipal bonds, raih-oad 
and mining bonds and shares, is computed by Mr. Wells to be 
1,465 millions. The rate of interest being higher here than in the 
Old World, European capital has been attracted here in so large 
quantities, that our annual remittances for interest already consti- 
tute no small portion of our exports. We do not call these remit- 
tances " a drain upon the resources of the country," as they are 
often denominated by the unthinking; for the transactions on 
which they are founded have swelled those resources far beyond 
the limit which would otherwise have bounded them. Still it is 
satisfactory to remember, that, as the monetary revolution will op- 
erate exclusively to the benefit of the indebted party, our own land 
will derive as much benefit from it, in proportion to our means, as 
any country on earth. 



CHAPTER XIV. 

THE FUNCTIONS OP BANKS AND THE NATURE OF BANK-NOTES : THE 
OPERATIONS OF CREDIT. 

I DO not know any more efficient means of aiding commerce in 
its great work of supplying the wants of all through the inter- 
change of commodities, and of preventing inequalities and fluctua- 
tions of prices, than the establishment of Banks. They accomplish 
this great good by applying systematized and combined effort to 
promote and equalize the operations of credit, and thereby to 
economize the use of capital. Capital is created from the savings 
of income, through the industry and frugality of the producers. 
But those who create are not always competent to employ it ; 
and in most cases, it cannot be successfully and economically 



312 BANKS AND BANK CUERENCY. 

eraployed except when it is accumulated in large masses. 
Before the institution of Banks, individuals who made savings 
from income were obliged to put them into the most portable 
form, (that of gold, money, or jewels,) and lock them up in vaults, 
hide them in old stockings, or bury them in the ground, where 
they remained useless, except as provision against a future rainy 
day. Banks may be best described as contrivances for bringing 
together these otherwise useless driblets of capital into large 
masses, and keeping the whole in constant activity, by apportion- 
ing them out on loan to those who, for the time, have most need 
of them and can use them to best advantage. 

All enterprises, whether of agriculture, manufacture, or com- 
merce, in order to be prosecuted with any success, require to be 
aided by capital. This is a sufficiently familiar truth ; but the 
additional truth is often lost sight of, that the capital required in 
any one enterprise or occupation is not a fixed quantity, but is 
perpetually varying, changing not only from one season to another, 
but from month to month, and even from week to week. It 
cannot always be foreseen how much will be needed at a par- 
ticular time, until that time is close at hand. Thus the farmer 
needs advances of capital in the spring and summer, to be repaid, 
and probably with a surplus left, soon after the crops come in. 
The ship-builder, the iron-master, the railroad-contractor, need 
comparatively little at first, but their wants go on rapidly enlarg- 
ing as their products approach completion ; when these are fin- 
ished and paid for, they have — or rather, without Banks, they 
would have — large balances unemployed. Almost every mer- 
chant, whether he has much or little independent capital, has his 
separate lists of Notes Eeceivable and Notes Payable; that is, 
he is obliged at the same time to be both lender and borrower. 
If there were not great facilities for credit, ample opportunities 
both to lend and to borrow, which can be improved even at a 
day's notice, there would be great waste, — large amounts of 
capital lying idle all the time, and yet industry and enterprise 
crippled in at least half of their task by the want of capital. 

Banks are institutions to equalize the demand and supply 
of capital, so distributing it that "he that gathered much had 
nothing over, and he that gathered little had no lack." They ac- 
complish this result by the use which they make of credit, which 



BANKS AND BANK CURRENCY. 313 

may be defined to be the confidence which one man reposes in 
another in respect both to his disposition and his abiUty to return 
that which he has borrowed, or its equivalent. It is a means of 
putting capital into the hands of those who, for the time being, 
can use it to the best advantage, though they are not the owners 
of it. The whole principle of banking, says Lord Overstone, " is 
to transfer capital from the inactive accumulator to the active 
and energetic person who wants capital." 

The utility and profits of capital depend upon its activity, upon 
the speed, skill, and judgment with which it is consumed and 
reproduced. The capitalist himself may be deficient in all the 
important requisites for managing his own property ; he may 
have inherited it, and therefore have had no experience in the 
mode of acquiring and using it ; or from the very fact that he is 
a capitalist, or a man of fortune, he may not be willing to give 
time and labor to its superintendence, preferring to consult his 
own ease and amusement ; or his capital may be so large, that, 
although in active business himself, he may not be able to super- 
intend or manage the whole of it, but may feel obliged to lend a 
large portion of it. From these various circumstances, there 
is always, in every wealthy community, a vast amount of capital 
to lend, — much more than is generally supposed. For capitalists, 
banks, and other lending institutions are commonly thought to 
manage and superintend their own property, when they simply 
direct its investment, or determine to what persons or institutions 
they will by preference lend it. But it is not so. The real 
manager of capital is he in whose hands it exists, not in the 
form of money, stocks, or other securities, but in the form of 
goods, — whether of raw material to be manufactured, or of tools 
and machinery for use, or of ships and other means of transport, 
or of merchandise for transport and sale. There may be half a 
dozen applications of credit, half a dozen lending.s, between the 
proper owner and this manager of the capital. For instance, the 
owner may prefer to lend his capital to, or invest it in, a bank ; 
the bank may lend it to a broker ; the broker may employ it in 
buying up a promissory note ; and the original giver or promisor 
of this note is probably he in whose hands the actual property 
represented by all these transactions is really placed, for the time 
being. He is the manager of the capital, whose true ovmer is not 
probably known to him even by name. 



314 BANKS AND BANK CUREENCY. 

It ought to be remarked that credit, however enlarged, cannot 
increase capital, — cannot create wealth ; it can only transfer from 
one hand to a.nother the wealth already in being. " Credit has 
a great, but not, as many people seem to suppose, a magical 
power; it cannot make something out of nothing. If the bor- 
rower's means of production and of employing labor are increased 
by the credit given him, the lender's are as much diminished." 
It is true that the debt is still a portion of the lender's property ; 
and though not immediately available as such, because it is a debt 
not yet due, it may be used as security on which an equivalent 
sum may be borrowed from a third party. Still, no capital is 
created; only B has made over a certain amount of capital to A, 
and C has transferred an equal amount to B. Credit can never 
assign to one without subtracting from another. 

A Bank is a reservoir which collects in amounts available for 
use the rain-drops which would otherwise be lost by dispersion ; 
and it brings borrowers and lenders together, knowing that their 
respective wants can be supplied by concert and previous arrange- 
ment. The two legitimate sources from which the bank can make 
loans are its Capital and its Deposits. The former is, on the part 
of the stockholders, a permanent loan, its owners not expecting to 
receive it again for many years, except by means of selling their 
stock to other persons, or by obtaining a temporary use of it as 
a loan, pledging this stock as security. The Deposits, on the 
other hand, are a temporary loan in the narrowest sense of the 
term, being lodged in the Bank only while the owners have no 
use for their funds, and being liable to be drawn out by them at 
any moment without notice. As already explained, merchants 
and manufactixrers, and even many individuals not now engaged 
in business, must have considerable surplus funds on hand to meet 
the constantly varying demands against them, which cannot al- 
ways be foreseen. But these surplus funds need not be so large 
as they otherwise would necessarily be, if they have an arrange- 
ment with a Bank, whereby, in consideration of depositing with it 
this surplus when they have no occasion for it themselves, they 
shall be entitled to obtain loans from it to a corresponding, or 
even greater, amount, when a time comes for them to make large 
payments. It is even a convenience for them to make such 
deposits, though they did not look forward to some future accom- 



BANKS AND BANK CURRENCY. 315 

modation in retui'n; inasmuch as they thereby avoid the risk 
of fire and burglars if the money were in their own keeping ; and 
it is more convenient to make any payment by a check than by 
counting out the money. This method also obviates the trouble 
of paying fractional parts of the sum in coin. 

But the question will be asked, — How can the Bank safely 
make any use of the sums thus deposited, seeing that any num- 
ber of them are liable to be withdrawn at any moment 1 The 
answer is easy. The Bank could not safely use the capital if it 
had but one depositor ; but having many, — hundreds, perhaps, 
— it can safely employ the whole average amoimt of the Deposits 
in discounting notes for its own profit ; as experience shows that 
their average amount continues with little fluctuation, the daily 
withdrawals by one set being constantly made up by fresh de- 
posits from another set. The demands for money vaiy so much 
with different persons, and in different employments, that while 
A, B, and C are drawing down their deposits to little or nothing, 
X, Y, and Z are increasing theirs at least to an equivalent extent. 
Taking the official weekly returns for all the Banks in the city of 
New York for 1856, I find their average amount for the whole 
year to have been about 64 millions of dollars ; that, in any two 
successive weeks, this average never varied over three millions, or 
less than 1 1 per cent ; and in any two successive months the 
variation did not exceed five millions, or less than 2| per cent. 
Observe, then, the prodigious economy in the use of money 
effected by this single function of the Banks. Were it not for 
their agency, this average sum of 64 millions of dollars, or 98| 
per cent of it, would necessarily remain unused, in the pockets or 
safes of one set of merchants or another, from the beginning to 
the end of the year ; any one who did not thus keep idle his 
proportional part of it would subject himself to the peril of bank- 
ruptcy at any moment. Since the adoption of Paper Money as 
the currency of this country, the aggregate of deposits in all the 
National Banks has come to exceed 600 millions, one third of this 
sum being in the Banks of the city of New York. Interest on 
this amount at 6 per cent, or 36 millions of dollars, is the annual 
advantage from this action of the Banks in economizing the use of 
money. 

Hitherto I have spoken as if the whole amount of the Deposits 



316 BANKS AND BANK CUEEENCY. 

in any Bank were in a state of perpetual movement, — passing 
out, so to speak, of one door of the Bank, but immediately coming 
back through another, — being drawn down by one set of de- 
positors and forthwith replaced by another. But it is important 
to observe that nearly this whole movement of the Deposits, so 
far as the depositors are concerned, is fictitious or imaginary ; that 
the Deposits do their office for their respective owners, effecting 
all, or nearly all, their payments, without being removed by them 
from the Bank at all, simply by a few entries on the Bank-books, 
whereby, without being touched, they are transferred from the 
credit of one person to that of another. Here we have the ex- 
planation of the curious historical fact, that all the heavy pay- 
ments made by merchants and dealers in the great commercial 
city of Amsterdam, for half a century, were made through a 
supposed deposit, which had entirely disappeared probably some 
fifty years before its removal was detected. This assertion, seem- 
ingly extravagant, is at once rendered credible and easy to be 
understood by a moment's reflection, which satisfies us that the 
200 millions now supposed to be deposited in the New York city 
Banks never existed there at any one time, — not even the fifth 
part of them ; but that over four fifths of the Deposits are 
constantly lent out by the Banks to their several customers. It 
is well known, that, if a quarter part of the depositors should come 
at the same time to the Bank to demand and actually carry off 
their funds, the institution would be directly obliged to stop 
payment ; its funds actually on hand could not satisfy one fifth of 
the claimants. In the panic of 1857, the New York depositors, 
either in their fright or to teach the Banks a lesson, did withdraw, 
not in one day, but in the course of the first two weeks of October, 
ten millions, or one sixth of what was then the aggregate of the 
Deposits ; and the immediate consequence was, that every Bank in 
the city stopped payment. 

But how can the depositors have the free use of their funds on 
demand, and without notice, and yet never carry them away from 
the Bank 1 Because they never need to use them except to pay 
or to lend ; and, in either case, the creditor or the borrower is also 
.a depositor sd, the Bank or at some other Bank. The circulation 
of the Deposits is just as free as that of the Bank-bills ; only the 
former complete their circuit without ever going out of doors, or 



BANKS AND BANK CURRENCY. 317 

changing hands in any other sense than b}' a transfer on the Bank- 
books from the credit of one person to that of another. Strange 
as it may seem, this circulation of the Deposits was never explained, 
or in any way taken notice of, either in books or in any discussions 
upon the currency, till a few years ago ; but it seemed universally 
to be believed, that no payments could take place except by an 
actual transfer of specie, or some form of currency, from one hand 
to another ; and hence that no increase of trade could take place 
except through a corresponding augmentation of the cvu-rency. 
But except in the petty transactions of every -day life, in which 
small purchases and small debts are certainly settled by the 
delivery of coin or Bank-bills, the real medium of payment be- 
tween commercial men in the same city, — and even, to a great 
extent, in different cities, though they are on opposite sides of the 
ocean, ■ — the real medium of payment, I say, is the transfer 
of Deposits, — nay, even of imaginary Deposits, inasmuch as the 
funds transferred on the books notoriously are not present in 
the Banking-house on whose books the transfer is accomplished. 

Suppose by procuring a discount, or having notes at maturity 
paid in to his order, that a merchant. A, has $20,000 standing to 
his credit as a Deposit. His notes to B and C for $10,000 each 
becoming due, he orders a transfer, through his checks, of this sum 
to their credit, thereby cancelling his own obligations. The de- 
posit now stands credited to B and C ; and in their turn, having 
notes to pay, they order its transfer to D and E. In this manner, 
successive transfers of this one sum of $20,000 on deposit may, 
in the course of a week, cancel indebtedness to the amount of a 
quarter of a million ; for at different hours of the same banking 
day, A may transfer it to B, B to C, and C to D ; though in ordi- 
nary times, certainly, the transfer is not quite so rapid. All this 
practically takes place without the exchange of a dollar in money, 
whether of specie or paper ; and as the average total Deposit in 
our Boston Banks alone is over forty millions, the mere shifting 
of the credit for this sum on the Bank-books may, and does, wipe 
out two or three hundred millions of indebtedness every week. 
The relative amount of the Bank circulation, or of the specie re- 
serve, has nothing to do with this result, any more than it has with 
the position of the planets ; for the whole process might go on ixn- 
disturbed, if there were not a specie dollar or a paper dollar in 
existence. 



318 BANKS AND BANK CUERENCY. 

The little complication that is caused by different merchants 
keeping their deposit accounts at different Banks in the same city- 
is easily resolved. A, from the Merchants' Bank, pays his note for 
$10,000 to B at the Traders' Bank, by transferring that sum in 
Bank-bills from the former institution to the latter, A's deposit ac- 
count being debited, and B's credited, to that amount. Then — 
on the same day, perhaps — C, from the Traders', pays his note 
for $10,000 to D, at the Merchants', corresponding changes of 
credit being made. Each of the two Banks now holds $10,000 in 
bills of the other. At the Cleariug-House, on the same day, the 
two Banks swap back these parcels of each other's bills which they 
have received, and the transaction is squared all round. If any 
one thinks that the Bank-bills, in their specific character as Bank- 
bills, have any effect on the nature of the transaction, he may learn 
his mistake by referring to the practice in the city of New York, 
where frequently the checks are not paid in Bank-bills, but are 
merely certified as " good " by the teller of the Bank on which they 
are drawn ; thus certified, they are paid in as money at another 
Bank ; and then, at the Clearing-House, the Banks swap checks 
instead of Bank-bills. 

And here we have another proof how unfounded was the opinion 
held by successive Secretaries of the Treasury and many others, and 
which unfortunately governed our whole financial policy during the 
Great Rebellion, that the want of money was the source of all our 
financial difficulties, and that to issue more currency, whether as le- 
gal-tender notes, popularly called " greenbacks," or National Bank- 
bills, was the only way to '■'■float " the heavy loans which were re- 
quired, and to handle our national receipts and expenditures on the 
gigantic scale to which they had risen. In December, 1862, when 
over 222 millions of ''' greenbacks " had already been issued, in ad- 
dition to 167 millions of State Bank-bills still in circulation, and 
when gold, although there was a superabundance of it then hoarded 
in the country, had risen to a premium of over 38 per cent, so 
that a dollar in currency was worth only 72 cents in coin. Secretary 
Chase argued that " the government can resort to borrowing only 
when the issue has become sufficiently large to warrant a just ex- 
pectation that loans of the notes [greenbacks] can be had from those 
who hold or can obtain them " ; and he alleged that the takers of 
a recent loan of thirteen millions had found it difficult to obtain 



BANKS AND BANK CURRENCY. 319 

" gi-eenbacka " with which to meet their engagements to the Treas- 
sury. I answer, that the government needed to borrow only in 
order to pay contractors and the army ; and that ten times thir- 
teen milhons might have been obtained for that purpose, in a single 
day, in the city of New York alone, merely by ti'ansferring Deposits, 
without the use either of a gold or a paper dollar. A number of 
merchants and capitalists, by selling stocks or other property, 
could easily have 130 millions transferred to their credit in the 
Banks in one day. Then they could honor the checks of the 
Treasurer of the United States, by transferring this sum to the 
credit of a little crowd of contractors, who had furnished provis- 
ions, uniforms, arms, gunboats, and the like, to our army and navy. 
On the next day, the contractors would probably transfer a con- 
siderable poi'tion of this sum to the capitalists who had advanced 
funds to enable them to fulfil their contracts ; and thus a portion 
of the Deposits, without even leaving the Bank, might find their 
way back to the credit of the very persons who had loaned them 
to the government two days before. Such a loan, like every other 
loan, is really made from the Floating Capital of the country. 

Still the qualification must be made, that Bank Deposits are 
not money, but means of economizing the use of money. Any 
movement of them is a " transfer of indebtedness," which offsets 
the transfer of some portion of the Floating Capital of the country. 
Hence their action is precisely similar to that of accounts-cuiTent, 
bills of exchange, and other offsets of debt and merchandise. Mi- 
chel Chevalier, the distinguished French Economist, says of them : 
" Let me repeat, that all these instruments which, together with 
gold and silver, pass from hand to hand to liquidate transac- 
tions ; all those combinations which dispense with the use of any 
instruments of circulation whatever, among which the bank Deposit 
is the most remarkable, are to be classed together under one pre- 
cise and simple denomination, that of credit. All these contrivan- 
ces and instruments of credit are substitutes for money, and not one 
of them is money itself; and any attempt to treat them absolutely 
as money would be attended with the most serious inconvenience. 
It would be as great a mistake as to confound the portrait with the 
original, the shadow with the substance." 

And Lord Overstone, the eminent banker who is the real author 
of the present banking system of England, remarks : " Deposit 



320 BANKS AND BANK CURRENCY. 

business is a mode of economizing the use of the circulation ; by 
means of resorting to that process, a greater amount of obhgations 
or of transactions can be adjusted with a smaller amount of circu- 
lating medium than could otherwise take place ; but an economic 
use of the circulation is not itself circulation. * * * * A less 
amount of the circulating medium of the country has been suffi- 
cient to perform certain functions, in consequence of that economic 
process of using the money which arises out of banking deposits. 
The same thing exists to an enormous extent in the system of the 
Clearing-House ; but will any man in his common senses pretend to 
say that the total amount of transactions adjusted in the Clearing- 
House is part of the money or circulating medium of the country ] 
The Bank of England, or any other banker, can clearly pay his de- 
posits only to the extent of the banking reserve in his till. The 
banking reserve in his till is the money with which that business 
is worked, and constitutes the amount of circulation under his con- 
trol. It is to mistake the amount of business done for the instru- 
ment with which it is done to call Deposits circulation. Deposits 
are the business worked, the reserve in the banking-till is the in- 
strument with which they are worked, and the instrument by 
which your business is worked is the circulation or money of the 
country." 

"We are thus brought to consider another function of the Banks. 
In this country, these institutions, it is well known, have three 
perfectly distinct functions; viz., Deposit, Discount, and Circula- 
tion. I call them distinct, because each of these offices might be, 
and often has been, exercised by itself, without being combined 
with either of the others. The business of discounting is com- 
monly known as that of lending money ; it might more properly be 
called that of purchasing debts, or furnishing in advance the pres- 
ent value of promissory notes or bills of exchange, which have stiU 
some weeks or months to run, the difference between their present 
worth and what they will bring at maturity being the discount, or 
what the Bank charges for lending its credit in the transaction. 
I say " lending its credit," because the Bank very seldom has oc- 
casion to use real money in this portion of its business. In fact, 
for the most part, it barters one sort of indebtedness for another, 
its own promises to pay for other people's promises to pay. It 
deals in paper evidences of debt, such as promissory notes, drafts, 



BANKS AND BANK CURRENCY. 321 

bank-bills, and bills of exchange. Observe that this paper is not .a 
part of the Floating Capital of the country, and therefore to in- 
crease the quantity of such paper is not to augment that Capital. 
The " paper constitutes, it is true,- an article on the credit side of 
the books of some men ; but it forms an exactly equal item on the 
debit side of the books of others. It constitutes, therefore, on the 
whole, neither a debit nor a credit." Or the matter may be put 
in another light, thus : As the material articles which constitute 
the Floating Capital of a nation are perpetually changing form and 
changing hands, while the property or ownership of them often re- 
mains unchanged, there must be evidences of that ownership, such 
as notes, bills, and stocks, which are mere representatives of the 
wealth existing elsewhere. Their value to the owner of them con- 
sists only in the fact that they enable him, whenever he sees fit, 
to reclaim his property, or to take possession of those articles which 
actually belong to him, though for a time he has trusted them to 
others. 

Now the Banks traffic in these evidences of indebtedness or cer- 
tificates of ownership, exchanging one class of them for another. 
But as they are instituted only for the convenience of the trading 
community, whose wants, though perpetually recurring, are tempo- 
rary in their nature ; (since each individual merchant, as already 
explained, has a superfluity of capital one week, and perhaps a 
great need of more the next week ;) the Banks legitimately dis- 
count only what is called short paper, or indebtedness which has 
but a short time — say, from thirty days to six months — to run 
before it comes to maturity, or is to be paid. They do this, not only 
becaiise a greater quantity of such paper is offered to them, but 
for their own security, since the sums so loaned out return to them 
more frequently and in larger masses, and they can thus be more 
quickly brought within their own control, to guard against unfore- 
seen emergencies. Moreover, they thus run less risk of the insol- 
vency of their debtors. They can tell with some confidence whom 
it is safe to trust for a few weeks, or even a few months. But in 
a community where the fluctuations of fortune are as great and 
sudden as in this country, one does not know that it is safe to 
trust anybody for a year or two ahead. 

It is no part, then, of the proper business of the Banks to 
discount the notes of the United States government, which 

21 



322 BANKS AND BANK CUEEENCY. 

recently flooded the market, and had three, five, ten, or twenty 
years to run. The Banks were not deficient in patriotism dur- 
ing the war, because they extended httle other accommodation 
to the National Treasury than a few temporary loans. They 
exist for the benefit of the merchants, who have furnished their 
Capital and Deposits for a special and necessary use of their own ; 
and to lock up a large portion of these funds in a permanent loan 
to the government would have been to deprive commerce of the 
necessary means of doing its work, and thereby to bankrupt half 
the mercantile community. The old State Banks had their 
capital and deposits, as a fund out of which to make loans to 
trade ; the new National Banks have their deposits alone to use 
for this purpose, (the circulation of the two systems being sup- 
posed to be equal,) their whole Capital being permanently lent to 
the government. Whether they can thus perform the functions 
which are required of them by the exigencies of commerce re- 
mains to be seen after trade has settled down on a permanent 
basis, and with specie payments enforced. 

We are now prepared to see what are the two classes of evidences 
of indebtedness which it is the business of the Banks to exchange 
for each other. The depositors at the Banks may be divided into 
the Debtor class and the Creditor class, the former holding more 
property, or Floating Capital, than they really own, and therefore 
having a »succession of notes to pay ; the latter having in their 
possession much less property than they own, and therefore having 
a succession of notes to be paid to them. The Bank itself is 
an association of persons of the Creditor class, who have Floating 
Capital at command, but, not needing to use it for themselves, 
they desire to lend it to others, that they may have the benefit 
of the interest ; in other words, they have good debts owing 
to them, already matured or payable on demand, which ihej are 
willing to transfer to others, who have need of such paj^ments, or 
rather of those articles of Floating Capital which constitute such 
payments. A certain amount of good debts of this class, payable 
on demand, forms the Capital of the Bank. Sometimes this Capital 
is " paid up " in the bills of other Banks, which are evidently 
debts of this description ; sometimes it is paid in specie ; but 
then this specie is immediately loaned out, or put into the form 
of debts. 



BANKS AND BANK CURRENCY. 323 

In prosperous times, when credit is good, the Bank and the 
Creditor class of depositors, unwilling that their funds, existing in 
this form of debt, should lie idle on deposit, lend them freely 
to the Debtor class, receiving notes " on time," as the phrase is, 
— that is, at two, four, or six months ; in other words, they re- 
ceive another class of debts. The nature of the loan is, that a 
deposit (that is, a debt due on demand from a Bank, and there- 
fore just as available as specie in making purchases or paying 
debts) is exchanged for a note on time from an individual, with 
or without collateral security or indorsement. This, then, is the 
nature of all large loans or payments ; they are transfers of in- 
debtedness, — exchanges of debt due from the bank 2^(i>/(ible on 
demand, for private or individual debt, due some time hence ; or vice 
versa. Whether the debt due from the Bank is in the form of 
Bank-bills or of a deposit is of no importance, as one is readily 
exchanged for the other ; the bills may be deposited, the deposit 
may be drawn out as bills. In either form, in ordinary times, 
it is immediately redeemable in specie, and hence is quite as 
acceptable for cancelling obligations or purchasing commodities as 
the specie itself 

When credit has been pushed too far, and distrust begins to 
prevail in the community, the Creditor class are less willing to 
exchange immediate Bank debt for prospective private debt, even 
when tempted by high rates of interest. They allow a large por- 
tion of their funds to revert into the former state, which is more 
secure, but less profitable, by enforcing payment of the private 
debt as fast as it matures, without reiuA^esting the proceeds. The 
aggregate amount of the Deposits may be the same, but instead 
of circulating freeh', they are now accumulated in sluggish masses 
to the credit of the Creditor class ; and distress of the Debtor 
class is the inevitable result. Specie reserves, and other legis- 
lative precautions against overtrading, affect at best the security 
only of the immediate Bank debt, which nobody distrusts even in 
a time of commercial panic. The real evil which leads to such a 
panic is the excessive amount of private prospective indebtedness, 
which the action of the Banks has done nothing to foster, and is 
powerless to relieve. 

I pass now to what is, in this covntrif, the third function of all 
chartered Banks, — viz. the issue of Circulation — Bank-bills, or 



324 BANKS AND BANK CURKENCY. 

their own " promises to pay " — to serve as currency. My first 
remark is, that the exercise of this third function is not at 
all necessary for the proper execution of the work which the 
-Banks are instituted to perform, viz. to aid the merchants in the 
legitimate operations of commerce. To receive Deposits, and to 
make short loans to their customers out of these Deposits and 
their Capital, is their sole legitimate business ; and this they are 
abundantly able to perform without issuing a dollar of their own 
currency. No charter, or special authority from the legislature, 
is needed to empower any one who has credit enough with the 
mercantile community to perform both these offices, since they 
are lawful acts of ordinary trade. A merchant has a perfect right, 
without asking anybody's leave, to put his surplus funds from time 
to time into the keeping of any other merchant whom he chooses ; 
and to do so on condition that this other merchant will not 
only return his deposits on demand, but will also make loans to 
him to a reasonable extent, whenever he needs them. 

This is what is meant by the cry often raised for the perfect 
freedom of unlicensed banking. There are already many such pri- 
vate bankers in Boston and New York, both in and out of State 
Street and Wall Street, most of them, it is true, enlarging their 
work by dealing in foreign exchange, which is another legitimate 
operation of free banking. If an individual, or a firm of three 
or four partners, have not capital and connections enough to do 
this work profitably, a greater number might unite into a joint- 
stock association for these purposes, under a general incorporation 
law ; since the power to svie and be sued in their corporate name, 
and the principle of limited liability, each stockholder being re- 
sponsible only for the amount of his stock, can be as reasonably 
demanded by such a company as by any association of cotton, 
woollen, or iron maniifacturers. It is so in the city of London, 
where most of the banking business is performed by some fifty 
private banking firms, and eight or ten large Joint-Stock Banks, 
not one of which, whether private or joint-stock, issues a shilling 
of its own currency. The Bank of England is, in all essential 
respects, a great fiscal agent of the government, acting under the 
general supervision of Parliament and the Ministry, and rendering 
a fair equivalent, by its services to the Treasury and in the man- 
agement of the National Debt, and by an annual payment of 



BANKS AND BANK CURRENCY. 325 

£180,000, for the exclusive privilege which it enjoys of issuing 
its own currency for the city of London and for a region within 
65 miles thereof 

In 1857, three of the Joint-Stock non-issuing Banks held, in the 
aggregate, thirty-three millions sterling, or over 150 millions of 
dollars, in private deposits ; while those deposits in the Bank of 
England amount, on an average, to only sixteen millions sterling. 
Even here in America, as the theory of banking comes to be 
better understood, and its practice is gradually perfected, espe- 
cially at our great centres of commerce, the fact is becoming 
apparent, that the privilege of issuing their own currency is com- 
paratively of little worth to the city Banks, and might be given up 
altogether without materially diminishing their profits. In the 
city of New York, for instance, before the war, while the Banks 
often had over 90 millions of Deposits, and made loans amounting 
to 125 milhons, their aggregate Circulation did not exceed eight 
millions. Make a fair allowance for the expense and trouble of 
managing this currency, and it will appear that, if the privilege 
of issue were surrendered, the Banks would not lose \ of one per 
cent of their profits. As for the country Banks, their privilege of 
issuing their own bills as money has been in very many cases 
so atrociously misused, leading to great losses by the community 
at large, to political intrigue and corruption, and to the great 
injury of the banking system itself and of the merchants who 
depend upon it for aid, that common justice and prudence require 
its entire abolition. 

There are two perfectly distinct currencies or media of exchange 
in use, — the first by Banks and merchants in their financial trans- 
actions, the second by the gi*eat body of the community in their 
intercourse with each other, and in making purchases of the retail 
traders. The former consists mainly in the transfer of Deposits 
by checks and drafts, and in offsets through accounts-current, 
bank-bills appearing only in comparatively insignificant quantities 
for squaring the accounts or settling small balances. The latter 
consists exclusively of bank-bills, and of coin in small quantities 
for convenience as change. The great body of the consumers 
have no dealings with the Banks, and know nothing of their modeq 
of operation, except as they occasionally place their surplus earn- 
ings in Savings' Banks. They receive their wages, salaries, or 



326 BANKS AND BANK CUKKENCY. 

small incomes from independent sources in bank-hills and coin, 
and make all their purchases and payments in this currency, 
paying cash (as the phrase is) for all that they get ; or, if they get 
credit occasionally, they settle the account at last by payment in 
bank-bills, — mostly in those of small denominations, seldom see- 
ing anything larger than a ten-dollar note, and that not frequent- 
ly. If a twenty or fifty dollar note happens to stray into their 
possession, they either obtain change for it immediately, or hoard 
it, or lodge it in a Savings' Bank. Merchants, also, make what 
small purchases they have occasion for, in personal or household 
expenditure, from retail dealers, in this currency, and therefore 
keep a small amount of it in their possession. But they mostly 
carry their professional habits of trade down into these petty 
transactions of home life by purchasing articles of household con- 
sumption on account from a few tradesmen, and settle the account 
at the end of a month, or of a quarter, by a check upon the Bank. 
And in their proper commercial operations, whether as retailers 
with jobbers, jobbers with importers or wholesale dealers, or all of 
them with the Banks, and the Banks with each other, bank-bills, 
or money properly so called, hardly appear at all, — never appear, 
it might be said, except to adjust fractional differences. Their 
operations, whether on a larger or smaller scale, are completed at 
last, as monetary transactions, by passing a few checks or notes, and 
making a few entries on their books. Obviously, therefore, trade 
is thus far reduced to direct barter of commodities for commodi- 
ties, the idea of money being introduced only to furnish a unit of 
measurement, or means of comparative valuation of the merchan- 
dise exchanged. 

There is, then, what may be called a deposit currency, (though, 
strictly speaking, it is no currency at all, but a system of can- 
celling debts by offsets,) which is properly furnished by the Banks, 
and is used exclusively by merchants and manufacturers in their 
capacity as dealers; and there is a small-note currency used 
by the people at large in their capacity as consumers. To issue 
this last is no proper office of the Banks, and never would have 
been permitted to be assumed by them but for the accident that 
bankers were the first to discover, or invent, this mode of econo- 
mizing the use of specie, or money properly so called, and, finding 
it very profitable, chose to keep the benefits of their discovery to 



BANKS AND BANK CURRENCY. 327 

themselves, or to purchase the privilege of issuing it from the 
legislature, as the Bank of England did less than two centuries 
ago, the price paid being the loan of its whole Capital to the 
government. A Bank might exist, might exercise the two func- 
tions now explained of Deposit and Discount, and pay dividends of 
a reasonable amount to its stockholders, though the currency 
of a country should consist exclusively of gold and silver. The 
establishment of the Bank would lessen the amount of these two 
metals required for making exchanges, — would limit them in 
great part to the retail trade, or to transactions between dealers 
and consumers, — the business of dealers with each other being 
adjusted almost exclusively by checks transferring Deposits. 

But it now becomes a question, whether the precious metals may 
not be dispensed with, even for this service. They are needed 
only to be passed from hand to hand ; their material and specific 
qualities — their hardness, weight, etc. — are not wanted to fit 
them for such transfer. A scrap of paper would answer just as 
well to be passed about, provided only that the' receiver of it 
felt secure that it would not diminish in value while in his keep- 
ing, or that his neighbor would always be willing to receive it 
on the same valuation upon which it came into his own hands. 
Instead of effecting a purchase with five hard and weighty silver 
dollars, it would be even more convenient to effect it with a scrap 
of paper, which the holder is sure of being able to exchange at any 
moment, and without difficulty, for that sum in specie. The 
Bank, having relieved the large dealers from the necessity of using 
specie through its system of checks and deposits, may now relieve 
the smaller ones, and the community generally, from such neces- 
sity, by issuing its own notes for small sums, payable on demand 
in gold or silver at its own counter. In its immediate vicinity, 
such notes would evidently be preferred to coin, on account of 
their superior convenience ; beyond that vicinity, they would not 
circulate, because the distance would oppose an obstacle to their 
ivimediate conversion into cash, and because the circumstances 
and solvency of the Bank could not be so well known at a dis- 
tance. The issue of this currency, and the whole profit on its 
circulation, properly belong to the government, — that is, to the 
people at large ; because it is the people who use it, and if it 
is discredited, or becomes worthless, the whole loss falls upon the 



328 BANKS AND BANK CUKRENCT. 

people. As the loss is theirs, the gain also should be theirs. 
Independent of legislation, and without paying a full equivalent 
for the exercise of so very profitable a function, the Banks have no 
more right to create a national paper currency than they have to 
levy a tax on the community for the purpose of keeping up a 
police. The government alone, looking more to the interests and 
security of the whole people than to its own immediate gains, is 
competent to make the currency uniform throughout the country, 
and to surround it with proper safeguards and limitations. Per- 
haps it may elect for this purpose to use to some extent the 
agency of the Banks ; but then the Banks should act only in this 
subordinate capacity, the direction, the responsibility, and the 
profit being with the state. 

A double wrong has been committed by intrusting the Banks 
with this power to issue and control the currency of the people. 
It has been unjust and injurious to the Banks themselves, in that 
it has given rise to the opinion that they are properly subject to 
direction and restraint by the legislature, even in their two legiti- 
mate functions of Deposit and Discount. It has been unjust to the 
people, because they have thereby lost all the advantage which 
they ought to have reaped from their adoption of a paper circula- 
tion instead of specie, though they are still exposed to all the haz- 
ards which attend the use of this insecure species of currency. 
The same cause has led to a very injudicious increase of the num- 
ber of the Banks and the amount of Bank Capital ; they have been 
established in localities where they were not wanted, and where 
they even did harm to trade by fostering hazardous speculations, 
merely to secure the profit of supplying the local currency. This 
control of the circulation is of vastly greater importance in the 
United States than in any other commercial country, because spe- 
cie has been more completely driven out of use here by the issue 
of small bills. In EIngland, with slight exceptions, the smallest 
circulating note is one of five pounds sterling, or twenty-five dol- 
lars ; and as most persons, excepting merchants and wealthy peo- 
ple, do not need to have so large a sum as this in their possession 
at any one time, the bulk of the community use nothing but gold 
and silver coin. Hence it is that the whole paper circulation of 
England does not exceed about 120 millions of dollars, and ia 
mainly in the hands of traders. In this country, the amount is 



BANKS AND BANK CURRENCY. 329' 

now six times as great, and almost every person in the community, 
who is not an actual pauper, must have more or less of it in his 
possession, and suifer loss when it is discredited. So long, also, as 
each individual State exercises without control its privilege of 
creating Banks of its own, and empowering them to issue Bank 
currency, the evil is greatly enhanced, and all power of protec- 
tion and restraint is effectually taken away. Massachusetts, for 
instance, might regulate her own Bank currency ; but to what piir- 
pose, seeing that she cannot exclude from circulation within her 
own limits the unregulated Bank currency of the neighboring 
States 1 

I do not favor the exclusive use of coin, even in small transac- 
tions. Gold and silver are needlessly expensive as a circulating 
medium. We lose the whole annual interest on the vast sum thus 
required, and about one per cent more each year by its abrasion 
and the loss consequent on fire, shipwreck, and other casualties. 
Paper is cheaper, less burdensome, more convenient, and, when 
properly regulated, perfectly secure. But I insist that the whole 
people, who consent thus to use paper instead of specie, are en- 
titled to the whole profit or saving thereby effected ; that the 
Banks have no claim whatever to this profit, and do not need it ; 
and that the people ought also to be fully protected against loss by 
fluctuation in the value of this paper, or by failure to redeem it on 
demand in coin or bullion. These ends can be secured only 
through its issue, under proper pi-ecautions, by the government 
for the common benefit, the whole economy accruing from its use 
going to lessen the burden of taxation. Especially in the awful 
trial to which this country has recently been subjected, and from 
which, in a pecuniary point of view, it has not yet emerged, the 
whole people are entitled to all the benefits which may thus be 
reaped. We are at this moment trying the experiment of a paper 
currency on a larger scale than the world has ever witnessed. Pa- 
per is our only circulating medium down to the lowest copper coin. 
We can thus, if we will, save the whole annual expense of at least 
one seventh, probably of one sixth, part of our enormous National 
Debt. How this great advantage has been thrown away, and 
worse, partly by allowing the paper so to depreciate as to double 
the weight of taxation, and partly by making a free gift of the 
larger portion of it to a crowd of ill-regulated National Banks, will 
be shown hereafter. 



330 BANKS AND BANK CUERENCY. 

The proper function of a Bank is to supply funds for use only 
as Circulating Capital, the process of production being compara- 
tively a short one, and the value of the completed product soon 
serving to replace the advances which were necessary for wages, 
raw material, etc. while the work was going on. Thus it can 
lend to a farmer in the spring enough to buy seed-corn and to 
pay the wages of his laborers, and the proceeds of his crop at 
harvest-time will serve to repay the loan. It can lend a retail 
dealer enough to purchase an additional stock of goods, if there 
is a reasonable prospect that the goods will be sold, and the 
money be received for them, in season to meet the payment of 
the note which has been discounted. But the Bank cannot safely 
aid agricultural, commercial, or manufacturing enterprise by sup- 
plying funds for the construction of ships and machinery, for the 
digging of mines or canals, for the bringing of waste lands into 
cultivation, or for any long-winded speculation ; in short, it cannot 
supply funds to be employed as Fixed Capital. The values in- 
vested in any of these forms can be but slowly replaced, or only 
after considerable intervals of time ; the ship, or the machine 
which will last twenty years before it is worn out, can pay for 
itself only out of the accumulated profits of nearly twenty years. 
The builder, indeed, may safely obtain a Bank loan to enable him 
to finish his work, if it is his intention to sell the ship or the 
machine as soon as it is completed. In such case, he needs the 
funds for use only as Circulating Capital; it is the purchaser, 
or the person who intends to employ the ship or machine, who 
really needs the use of funds as Fixed Capital. Money lent for 
such purposes can be repaid, when due, only by other notes, which 
have a further term to run, and are negotiated with the deduction 
of discount. When these fall due, they are met by a third set 
payable at a still later date, and discounted in like manner. This 
operation is only an expedient for borrowing of the Bank in per- 
petuity, or for an indefinite series of years. 

Land-banks, as they are properly termed, have been instituted 
at various times in England, France, and even in some of the 
States of this Union, on the principle of lending capital upon the 
security of real estate, in order to make improvements upon the 
property. In such cases, the security, indeed, is unexceptionable ; 
but if the Bank currency thus issued is returned to the institu- 



BANKS AND BANK CUKRENCY. 331 

tion to be redeemed in specie, there will be only mortgages to 
be offered for it, and the Bank will be obliged to refuse payment. 
Consequently, the history of such Banks has been uniformly dis- 
astrous. 

As a general rule, the currency will not absorb Bank issues, or 
prevent them fi'om being soon returned for redemption in specie, 
if those issues have not furnished a means for the immediate crea- 
tion of fresh values, the proper circulation of which requires an 
additional amount of money. If Bank-bills amounting to one 
million of dollars, for instance, are lent to supply the manufac- 
turers with Circulating Capital, additional manufactured goods will 
be brought into market, in the course of a few months, to the 
value, probably, of $1,200,000, allowing 20 per cent for profit; 
and the numerous exchanges occasioned by this additional quan- 
tity of merchandise will require additional currency, not amount- 
ing, it is true, to one million of dollars, the original amount of 
the loan, but still sufficing to keep back a considerable portion 
of the bills from being presented for redemption at the Bank 
counter. On the other hand, if the same amount of bills should 
be lent to furnish the manufacturers with Fixed Capital, the addi- 
tional goods brought to market in the course of the next year 
might not exceed $150,000, and but a small portion of the bills 
would therefore be absorbed into the currency. 

In ordinary times, when specie is the only legal tender, if the 
paper issues of the Banks exceed the demands of circulation, there 
follows a perpetual reflux of the Bank-bills, which will soon drain 
the specie reserves, and can be checked only by a limitation of 
the issues. It is not necessary that the bills should be actually 
presented at the counter with a demand for their redemption in 
coin. They may also be brought back by the customers of the 
Banks, who make deposits with them, or return them in payment 
for their notes which have been discounted, and have fallen due. 

It is only in a period of excitement, during a commercial crisis, 
or an alarm for the solvency of one Bank or of all the Banks, 
that the notes are directly brought to the counter for redemption 
in coin. In ordinary times, the real limit upon the circulation of 
any one Bank is found in the daily settlement of its accounts with 
other Banks. In the Clearing-Houses recently established by the 
Banks both in New York and Boston, every Bank each day pre- 



332 BAIfKS AND BANK CUEKENCY. 

sents all the bills of the other Banks which it has collected in 
the day's transactions, and offsets with them its own bills which 
have been paid into those Banks ; only the balance, which is com- 
paratively a small sum, is settled by the transfer of specie. Any 
redundancy of its own issues is sure to be followed by the presen- 
tation at the Clearing-House of a larger amount of its own bills than 
it has bills of other Banks wherewith to redeem them, and by the 
consequent necessity of paying the difference in gold or silver coin. 
Checks drawn upon it against deposits must be met in the same 
way. 

Through these necessary dealings of the Banks with each other, 
they become the watchfid guardians of each other's solvency, and 
are connected by the closest ties of mutual dependence and guar- 
anty. The question which was formerly much debated in this 
country, whether the banking business of the community would be 
more safely transacted by one great natioual Bank, resembling the 
Bank of England or the Bank of France, or by numerous small 
Banks of comparatively private character and limited resources, as 
in what was the American system up to 1863, is one of no sub- 
stantive importance. As our small Banks necessarily deal with 
each other, by receiving each other's bills and settling their mutual 
accounts every day, they are virtually bound together into one in- 
stitution ; if the issues of any one of their number become exces- 
sive, the others are the first to perceive it, and are the first losers 
by its insolvency. This remark applies to them, however, only in 
their single function as Banks of circulation ; their two other 
functions, of receiving deposits and making discounts, may be, and 
often are, exercised by private merchants and capitalists, just as 
well as by the Banks themselves. And these two functions consti- 
tute far the larger part of the banking business. If the trans- 
actions of one great Bank are more publicly known and closely 
scrutinized, and if it can be managed by a few persons of high repu- 
tation for probity, wealth, and intelligence, so the consequences of 
its failure would be more general and more disastrous. It woixld 
not be watched by any rival institution deeply interested in an 
early detection of its insolvency. Massachusetts had 169 Banks, 
with an aggregate capital of over 58 millions, and an aggregate 
circulation of less than 23 millions. If all this business were con- 
centrated in the hands of one institution, even the rumor that it 



BANKS AND BANK CURRENCY. 333 

was in danger would create a panic that would paralyze the busi- 
ness of the whole State, and its actual failure would occasion al- 
most universal bankruptcy. But under what was the system up 
to 1863, the unsoundness of one Bank is quickly detected, and the 
rotten member is easily lopped off without shaking public confi- 
dence, or doing more than slight injury to very few individuals. 
The average circulation of a Massachusetts Bank was but little 
over $135,000, and that of the largest Banks did not equal half a 
million. There are many private merchants whose liabilities great- 
ly exceed this amount, and whose failure would be a more serious 
shock to public credit. And the cases of insolvency are proportion- 
ally more numerous among the merchants than among the Banks ; 
of the latter, there were not more than half a dozen failures in 
fifteen years. 

Nothing can be more erroneous than the common opinion that 
the Banks are able to increase their loans, and augment their cir- 
culation, at pleasure, or according to their own ideas of what is 
safe and expedient. There are no other funds from which loans 
can be made but (1.) the capital, (2.) the average amount of the 
deposits, and (3.) the excess of the circulation over the specie re- 
serve. The first of these is a fixed quantity, determined by the 
charter and the nature of the case. The amount of the second de- 
pends upon the number of the customers of the Bank, and upon 
the nature and extent of their business ; the deposits are made up 
by those who need to have money at hand, or within call, as it were, 
but have no immediate occasion to use it ; and though their de- 
posits are continually being withdrawn and replaced, or transfeired 
from one person's credit to another's, their average amount is nearly 
a fixed quantity, and, after a little experience, can be easily deter- 
mined. The third fund, though generally supposed to be variable, is 
in truth as much a fixed quantity as either of the others. We have 
seen that a reflux of the Bank issues is always steadily going on, 
not through their presentation for specie, but through the receipts 
in deposit and in payment of the loans and discounts which have 
come to maturity. The Bank can do nothing to lessen or retard 
this reflux, except by diminishing the issue of the bills. If it should 
suddenly and incautiously enlarge its issues to day, there would be 
an equivalent augmentation of the reflux to-morrow ; for as the com- 
munity was previously supplied with currency enough for its usual 



334 BA2SKB AND BANK CURRENCY. 

exchanges, the additional amount of money thus thrown into the 
market must come into the hands of persons who would have no 
immediate occasion to use it, but would lodge it on deposit in the 
Banks, and it would thus be immediately returned to the source 
whence it came. 

When specie is the only legal tender, if the currency be mixed, 
consisting of specie and convertible Bank-bills, the amount of 
Bank-bills of any given denomination which remains in circulation 
is determined exclusively by the convenience, the feelings, and 
preferences at the time, of the people among whom they circulate, 
wholly irrespective of the regulations and the efforts of the in- 
stitutions which issue these bills, — provided only that they issue 
them freely, or do not arbitrarily keep the supply below the 
amount which the community is willing and desirous to receive. 
The Banks may create a deficiency, but they cannot create an 
excess, in the circulation of such bills. In the numerous pay- 
ments which are daily made at the Banks, either in deposit or in 
liquidation of notes, that element of the currency, be it specie or 
bills, which is least in demand, least adapted to the present wishes 
and convenience of the people, will predominate, and will thus 
be quickly eliminated from the active circulation, till the ratio of 
the two branches of the currency is reduced to that point which 
the popular will requires. As the daily payments into the Banks 
must, on an average, just equal the daily payments out of them, 
no effort or contrivance of the Bank managers can avert this 
result. They mai/ pay out, they usually do pay out, nothing but 
bills, and therefore, as a general rule, only bills are paid in ; and 
thus the proportion of bills to specie continuing in circulation 
remains unaltered. But if a panic respecting the solvency of the 
Banks should be created, besides the usual payments in deposit 
and in liquidation of notes, bills will be presented at the counter 
to be cashed, or redeemed in specie ; and thus the proportion 
of coin in active circulation is rapidly augmented. After the panic 
has subsided, finding that so much coin is inconvenient, on account 
of its weight and bulk, and the trouble of counting it, specie will 
be freely paid in on deposit ; and then the Bank payments in bills 
will quickly restore the usual amount of paper to the currency. 

I have already borrowed from Adam Smith the ingenious illus- 
tration, that " the gold and silver money which circulates in any 



PAPER MONEY, 335 

country may very properly be compared to a highway, which, 
while it circulates and carries to market all the grass and corn 
of the country, produces itself not a single pile of either." He 
carries out the comparison still further. " The judicious opera- 
tions of Banking," he remarks, " by providing, if I may be allowed 
so violent a metaphor, a sort of wagon-way through the air, enable 
the country to convert, as it were, a great part of its highways 
into good pastures and corn-fields, and thereby to increase very 
considerably the annual produce of its land and labor. The com- 
merce and industry of the country, however, it must be acknowl- 
edged, though they may be somewhat augmented, cannot be 
altogether so secure, when they are thus, as it were, suspended 
upon the Daedalian wings of paper money, as when they travel 
about upon the solid ground of gold and silver. Over and above 
the accidents to which they are exposed from the imskilfulness 
of the conductors of this paper money, they are liable to several 
others, from which no prudence or skill of those conductors can 
guard them." 



CHAPTER XV. 

PAPER MONEY, AND ITS USB AS CURRENCY DURING A REVOLUTION OB 
CIVIL WAR : HISTORY OF THE EMISSION OF SUCH MONEY IN THE 
WAR OF THE REBELLION. 

We have still to consider the circulation of Paper Money 
properly so called, or of bills which do not profess to be immedi- 
ately convertible into specie. These are sometimes issued by the 
state, in cases of great emergency, and are then usually called 
legal-tender notes, or hills of credit. The Constitution of the 
United States declares that " no State shall coin money, emit bills 
of credit, or make anything but gold or silver coin a tender in pay- 
ment of debts." It is still a disputed question, whether this prohi- 
bition applies only to the legislature of any individual State, or 
extends also to Congress and the National government. This 
question has never come up for decision by the Supreme Court of 
the United States ; meanwhile, as we all know. Congress has as- 
sumed this questionable authority, and has exercised it ever since 



336 PAPER MONEY. 

1862, by sanctioning large issues of Paper Money or "biUs of 
credit " both by the National Treasmy and the National Banks. 
Bank-notes, of course, after the banks have suspended specie pay- 
ments, so that their notes are no longer convertible into coin on 
demand, become " bills of credit," or Paper Money. Thus the cur- 
rency of Great Britain consisted of Paper Money from 1797, when 
the Bank of England suspended payment, till 1819, when it again 
began to redeem its notes in specie. 

The distinguishing characteristics of Paper Money are, that it 
is inconvertible, and its circulation is compulsory. Thus, when the 
government has no longer the means of meeting its pecuniary en- 
gagements, it begins to make purchases and to pay its debts by 
issuing, not coin, nor bills immediately convertible into coin, but 
its own promises to pay at some future time. These " promises to 
pay " are made legal tender, — that is, creditors are compelled to 
receive them in satisfaction of their demands. Their circulation is 
compulsory, then; but the very fact that they are receivable ia 
payment of debts, as we have already shown, gives them a conven- 
tional value. To any person who has money to receive, it does 
not matter whether the money possesses intrinsic value or not, or 
whether the " promise to pay " which it bears upon its face is ever 
redeemed or not, provided he is sure that he can make payments 
with it, and cancel his own obligations. Paper doUars are as good 
as silver ones, so long as they wiU cancel debts and effect purchases 
equally well. 

Paper Money of this kind was issued by many of the American 
Colonies before their separation from England ; and from the vari- 
ous degrees of its depreciation in different parts of the country 
arose the different value of the shilling, which is still with us a 
popular denomination of account, though not an actual coin, and 
not recognized in the legal cuxToncy. The shilling was the de- 
nomination used in the Colonial Paper Money, Spanish dollars be- 
ing the coin in which they were ultimately to be redeemed ; and 
when the shilling had its par value, 4s. %d. were equal to a silver 
dollar. But paper shillings became depreciated, so that, in New 
England, six shillings came to pass for a dollar ; in New York, eight, 
and in Pennsylvania, seven shillings had this value. The names of 
these " shillings " and " pence " have remained for a century after 
the disappearance of the reality, and still create much confusion in 
the popular mode of reckoning money. 



PAPER MONEY. 837 

One remarkable experiment of Paper Money here in America was 
the Continental currency, as it was called, issued by authority of 
Congress during the American Revolution. The epithet " Conti- 
nental," like National or Federal nowadays, marked the distinc- 
tion between what was done by the government of the whole 
Union and the acts of the separate Colonies or States. In June 
and July, 1775, to meet the expenses of the war which was seen to 
be inevitable, Congress, having no other funds, issued three mil- 
lions of dollars in these bills of credit, with a promise, which was 
not kept, that they should be redeemed in four annual instalments, 
to commence at the end of four years. In November of the same 
year, the issue of three additional millions became necessary. Spe- 
cie, which had been scarce before, had now almost entirely disap- 
peared from the country, and the "Continental money" was consid- 
erably depreciated. So rapidly did this depreciation and the exi- 
gencies of the war increase, that in the course of the following 
year, 1776, fourteen millions more had to be issued. Additional 
issues continued to be made, and the paper continued to depreci- 
ate, until, in 1780, the amount in circulation was about 200 mil- 
lions ; and 500, even 1,000, dollars in this currency were oflfered 
for one in silver. Then, finally, the bills ceased to circulate, and 
became entirely worthless, as dealers would not accept them on 
any terms. 

No attempt was subsequently made to cancel the original ob- 
ligation by redeeming the bills, either in full or in part ; for as 
the depreciation had been gradual, while the bills were rapidly 
circvdating in the community, it had obviously become impossible 
to measure the exact loss which each holder of them had suffei*ed. 
To pay the last holder in full would only have aggravated the 
injustice, by giving him much more than was his due, and leaving 
his predecessors without any compensation whatever. It was 
justly remarked, that the depreciation of the Paper Money ought 
to be considered as a tax, inasmuch as the paper was first issued 
only to relieve the people from the necessity of paying a tax. 
Each person through whose hands the money passed parted with 
it again at a loss, proportioned to the quantity he held and the 
time he held it. As the currency circulated among the whole 
people, the rich and poor holding it, and suffering by its depre- 
ciation in proportion to the respective amounts of their cash 
22 



338 PAPER MONEY. 

purchases and sales, the whole loss was divided among them very 
nearly in just proportioa to their ability and liability to pay a tax. 
The payment of the whole value borne on the face of the bill to 
the last holder, who had received it at the rate, perhaps, of a 
hundred for one, could have been made only by a second tax on 
the same persons who had already been fairly and heavily taxed 
by its depreciation. 

The history of the Paper Money issued in France, in the course 
of the Revolution of 1789, is perfectly similar to that of the 
corresponding experiment in America. The French bills of credit, 
however, as their name (assignats) indicates, were nominally issued 
upon a basis of real property. The national domains, as they 
were termed, or the confiscated estates of the crown, the clergy, 
and the emigrants, were made over, or sold in mass, to the mu- 
nicipalities or towns in which they were respectively situated. 
These municipalities, not having funds to pay immediately, re- 
ceived the property on long credit, binding themselves to pay in 
instalments^ as fast as they were able to make sales of the estates 
without sacrifice. The creditors of the state then obtained their 
dues by receiving orders, or " assignments " (assignats), on the 
municipalities for a portion of the debt thus due to the state. 
These assignats were transferable property, which might be ex- 
changed for commodities, or assigned in payment of debts ; and to 
aid the negotiation of them, they were made transferable without 
indorsement, and constituted legal tender ; that is, they were con- 
verted into Paper Money; and as the issue of them increased, 
they displaced the sounder portions of the currency, and became 
the universal medium of exchange. 

As the expenditures of the state were heavy, through the 
war in which it was involved, and as it was an easy process to 
stamp and issue assignats in satisfaction of all demands, the 
issue of this Paper Money soon became excessive, and the inev- 
itable consequence followed, — its rapid and great depreciation. 
Bread rose to 22 francs (nominally over $4) a pound, and the 
prices of other commodities were in proportion. The issue of 
assignats amounted, in 1796, to the enormous sum of 45,000 mil- 
lions of francs. But the state receipts from taxes, loans, the sale 
of the national domains, and other causes, had reduced the amount 
actually in circulation to about 24,000 millions. They finally be- 



PAPER MONEY. 339 

came so much depreciated that, by a spasmodic effort, both the 
goverumeut and the people reverted to a specie currency. The 
final result of the experiment in France, as in America, was, that, 
through the depreciation of the currency, the people paid a very 
heavy tax for the success of the Revolution, — a tax somewhat 
irregularly and unequally imposed, but yet approaching as near to 
equity as could be expected from any public measure which had 
its birth in the exigencies and turmoil of a great civil war. 

Paper Money was also issued by the revolutionary authorities 
of Hungary and Rome in 1849 ; but the speedy restoration of the 
former government in both cases prevented the experiment from 
being worked out to an end. The government of the Confederate 
States also made lavish issues of Paper Money during the Great 
Rebellion. This Southern currency had fallen to one hundredth 
part of its nominal value before the capture of Richmond ; and 
after that event, of course, it became worthless and ceased to 
circulate. 

In fact, experience has proved, what might have been demon- 
strated from the theory of the subject, that this kind of money is 
a proper revolutionary currency. It is usually first issued amid 
the commercial disasters, and the destruction of public and private 
credit, which are among the first consequences of the overthrow 
of an old government, and the outbreak of a civil war. The way 
is prepared for the introduction of it by a violent contraction of 
the old currency, consequent on the general disappearance of the 
gold and silver coins, which everybody at such a crisis is disposed 
to collect and hoard, or to send out of the country. This gap 
or vacuum in the circulation manifests itself by the extraordinary 
low prices of all commodities, the difficulty of effecting sales of any 
kind of property, the consequent impossibility of meeting com- 
mercial engagements, and general bankruptcy. Some kind of 
money — it hardly matters what — is needed to fill up this gap : 
and it turns out, by a happy coincidence, that the issue of some 
sort of conventional currency is the only financial resource of the 
revolutionary government. At the trivial expense of stamping 
bits of paper with a vague " promise to pay " at some future date, 
the insurgent authorities, otherwise penniless, find their exchequer 
as well supplied for a time, as if, to adopt Mr. Ricardo's illustra' 
tion, a gold mine had been suddenly discovered within the pre- 



340 PAPEK MONEY. 

ciiicts of the public treasury. So long as the new currency is not 
more than sufficient to fill up the vacant space in the old one, its 
value will remain nearly at par ; — nearly, I say, because gold and 
silver coin, being capable of exportation, which Paper Money is 
not, will always command a slight premium. And the slight 
difference indicated by this premium will act still further in favor 
of the new currency ; because, for reasons already explained, the 
depreciated or overvalued money will drive out even what re- 
mained of the perfect and sound ciirrency, and take the whole 
circulation to itself. 

Any revolutionary government, therefore, though it should in- 
herit, as is most probable, only an empty treasury, may at once 
obtain funds equal in amount to the whole circulation of the coun- 
try, by merely issuing Paper Money to this extent. Still further ; 
this issue, coming immediately after a period of violent contraction 
of the currency, and of consequent low prices, inability to realize 
property or collect debts, general want of credit, and widely spread 
bankruptcy, will have the effect to raise prices again, to restore 
confidence, to animate commerce anew, and to diffuse through the 
country the glow of returning prosperity. All this will operate to 
the advantage of the new government, and the revolutionary fever 
pf the people will rise higher than ever. Yet again, as this Paper 
Money, now in universal use, depends solely upon the faith of the 
revolutionary government, whose engagements, it is feared, would 
not be respected by the former authorities, should they be restored 
to power, every person in the country has an interest in resisting 
such a restoration, and supporting the cause of the insurgents. 

It is thus that a heavy national debt and a depreciated paper 
currency, such as exist in Austria at the present day, though to a 
superficial glance they may appear as sources of weakness in the 
government, are in truth the pillars of its strength. Every capi- 
talist, every person who has any property to lose, under such cir- 
cumstances, will resist a revolution to the death, fearing that the 
successful insurgents would wipe out the debt with a sponge, and 
obtain room for a new batch of Paper Money by repudiating the 
former issue. Without its enormous national debt, it may be 
doubted whether even the government of Great Britain could have 
resisted as successfully as it did the political convulsions of the 
memorable year 1848. As it was, every stockholder and every 



PAPER MONEY. 341 

shopkeeper in London armed himself as a special constable, to re- 
sist the ragged army of proletaries who assembled on Kennington 
Common in April of that year. 

Could the revolutionists stop here, then, in their issue of Paper 
Money, all would be well. Unfortunately, they cannot stop. There 
is a necessity of lavish expenditure in a revolution, especially if the 
exigencies of a civil or foreign war are added to the other demands 
on the treasury. Having put forth Paper Money enough to fill 
up the whole circulation of the country, and being intoxicated 
with the brilliant success of this measure, the needy government 
finds itself compelled, not unwillingly, to issue more ; and then, 
inevitably, mai'ked depreciation ensues. As the depreciation goes 
on, moreover, the necessity of issuing more paper rapidly increases ; 
and hence it is, that, when the fall in value has once begun, it 
seems to continue and increase with fi^-ightful rapidity. When the 
depreciation, for instance, is at 50 per cent, the prices of all com- 
modities are doubled ; government must pay twice as much in 
wages and salaries, and for provisions and munitions of war, and 
must therefore pay out 200 millions to do the work which 100 
millions did before. At the same time, its resources are dimin- 
ished ; all payments to it, being made in the depreciated currency, 
are worth but half their nominal amount. AVhen the currency 
has fallen to one fourth the value of coin, 400 must be issued 
where 100 formerly sufficed ; and the deficit in the receipts being 
added, the proportion may be even five or six for one. 

It must not be inferred, however, that this rapid depreciation 
of the currency wiU seem to impede traffic or to paralyze industry. 
On the contrary, commerce and labor will be galvanized into un- 
natural activity, and a deceitful glow of animation and success, 
like the flush of a fever, will appear to pervade the nation. Prices 
rise, of course, as rapidly as the currency falls ; property which was 
sold for 100 to-day will command 500 or 1,000 to-morrow. At 
the same time, money is superabundant. The pressure of debt is 
also lessened ; obligations are cancelled by paying back what is 
actually but one half, one fourth, or a still smaller fraction, of the 
real value which was due. Ease in getting rid of old debts only 
creates a thirst for contracting new ones. Commerce is thus 
stimulated, while the basis on which it rests is every day becom- 
ing less secure. A reckless spirit of speculation, akin to gambling 



342 PAPER MONEY. 

in its character and results, appears to seize the greater part of the 
community. The circulation of Continental money in America, in 
1779, as we are told by a writer of that day, was "never more 
brisk and quick than when its exchange was 500 for 1." And 
M. Thiers, speaking of the depreciation of the French assignats in 
1795, says, that to the horrors of famine were added the scandals 
of reckless speculation and stockjobbing, the sale of merchandise 
which had no existence, as the pretended traffic was only betting 
upon prices, and the diifusion of a taste for luxury, dissipation, and 
excess, which is the invariable concomitant of sudden mutations 
of fortune. 

The same evils have been experienced in this country ever since 
the emission of Paper Money first became excessive, in the summer 
of 1862. While the uncertainty of the markets and the fluctua- 
tions of prices have depressed legitimate trade, and caused manu- 
facturing enterprise to be fitful and spasmodic, thus keeping the 
wages of honest labor below their natural ratio to the cost of liv- 
ing, reckless speculations in stocks, gambling in gold, the corrup- 
tion of legislative bodies and municipal councils, and even of the 
courts of law, and dishonest management of railways and other 
great industrial undertakings, have been so fostered as to debauch 
the public conscience and cast a deep stain upon the national 
character. Scoundrelism and effrontery in finance have so far suc- 
ceeded in amassing millions and escaping punishment, that they 
have almost ceased to be regarded as disgraceful. The prolonged 
use of Paper Money, and the enormous fluctuations in its value, 
have done even more harm to the morals of the country than to 
its commerce, its reputation, and its financial well-being. 

We can now explain the great difference between convertible 
bank currency and inconvertible bills, or Paper Money properly so 
called, — that the latter is liable to issue in excess, and consequent 
depreciation, while the former is not. We have seen that the for- 
mer is necessarily liable to perpetual reflux upon the institutions 
which issue it, the amount remaining in active circulation not de- 
pending at aU upon the wishes of the banks, but upon the con- 
venience of the public. This reflux takes place in three forms, 
through lodgements in deposits, the repayment of loans and dis- 
counts, and actual presentation at the counter for redemption in 
coin. These are but three forms of payment to the banks ; and in 



PAPER MONEY. 343 

the long run they must equal, and for a time they may easily ex- 
ceed, the payments out of the banks. It is for the public, and not 
for the banks, to decide what portion of this reflux shall consist of 
bills and what of specie, and, consequently, what portion of each 
shall remain in circulation. The banks can do nothing to affect 
this result. Those who fear an excessive issue of convertible 
bank-bills might as well apprehend that Lake Erie would overflow 
its banks and flood the country, because it is constantly receiving 
the surplus waters of the three upper lakes and innumerable tribu- 
tary streams. They forget that the average level of the lake de- 
pends, not merely upon the quantity of water flowing into it, but 
upon the quantity that flows out of it over Niagara Falls; and 
that nothing could affect the level except raising or lowering the 
bar at the opening of Niagara River, which regulates the rate of 
the efflux. 

But with Paper Money it is not so. In this case, there is no 
reflux and no occasion for repayment, so that the quantity in cir- 
culation depends exclusively upon the quantity emitted. The cur- 
rency consisting of inconvertible paper is like the Dead Sea, which 
receives the waters of the Jordan, but has no efiiux ; augment the 
flow into it, and the level must rise. The government pays out 
its Paper Money in discharge of its debts, in the purchase of com- 
modities, and in the payment of wages and salaries ; iu neither of 
these cases does it create any necessity for repayment, so as to 
bring the bills back again. True, the Paper Money is receivable 
by the state in payment of taxes and other government dues ; but 
then there will be no necessity of issuing it at all, unless the ex- 
penditures largely exceed the receipts ; and it is the amount of 
this excess, or the extent of the annual deficit, — very large in a 
revolutionary period, or in case of a civil war, — which determines 
the amount of the annual addition to the inconvertible paper cur- 
rency. As this currency is not available for remittances abroad, 
no diminution of it is possible through the purchase of commodi- 
ties in foreign lands. Every exit and channel of reflux being thus 
dammed up, the emission of every additional bill must advance 
the period when depreciation will begin, or increase the rate of 
that depreciation. To adopt Mr. Tooke's language, the distinction 
between Bank currency and government Paper Money is, that the 
latter is "paid away and is not returnable to the issuer, whereas 
the bank-notes are only lent and are returnable to the issuers." 



344 PAPER MONEY. 

If the banks suspend specie payment, their bills become incon- 
vertible, and are thus far assimilated to Paper Money. Still, though 
one channel of reflux is thus dammed up, the bills being no longer 
presentable for redemption in coin, they can yet be returned to the 
banks on deposit, and in repayment of the loans and discounts. 
Bank Paper Money is thus distinguished from government Paper 
Money, this last not being returnable at all. It is expended in the 
purchase of naval and military stores, in building ships, in construct- 
ing public edifices, and in the payment of services performed for 
the state, no means being taken to insure its return to the excheq- 
uer. The bank issues, on the other hand, being made only in the 
discount of approved promissory notes of short date, naturally re- 
turn after a short interval, even if they are not redeemable in spe- 
cie. So long, then, as the banks confine themselves to their proper 
functions, and do not squander their funds, or let them out on 
doubtful security, there is no reason why, even after a suspension, 
their currency should be depreciated, except to a very small extent. 
Thus, the Bank of England suspended specie payments in 1797, 
but its notes remained at par, or within two per cent of par, till 
1801. Then, indeed, a heavy demand for gold to be exported, on 
account of the large purchases of corn which were rendered neces- 
sary by the failure of the English crops, and of large expenditures 
by the British government in prosecution of the war, made specie 
rise to a premium, or, what is the same thing, the bank-notes to be 
depreciated seven or eight per cent. These disturbing causes being 
removed, the currency rose again in 1803, and continued at a point 
only 2| per cent below par till 1809. 

As soon as the currency has fallen considerably in value, two 
prices are established for commodities, one in specie and the other 
in Paper Money, the difference between the two marking the rate 
of depreciation. When this difference has become inordinate, the 
progress of the depreciation is most rapid, the value of the cur- 
rency fluctuating so suddenly and largely that most persons are 
unwilling to receive it on any terms. The rate to-day may be 500, 
and to-morrow 600, for 1 ; under these circumstances, also, the 
rate will be found to vary in different localities, and be variously 
estimated by difierent tradesmen. So much confusion and uncer- 
tainty are thus created, that, by a spontaneous movement of the 
whole community, the paper currency is discarded altogether, and 



PAPER MONEY. 345 

the price in specie is the only one that will be received in payment 
for commodities. If the paper has not already ceased, through 
the action of the legislature, to be legal tender, acknowledgments 
of debts are made with an express stipulation that the payment 
shall be in specie, or some other commodity of fixed value. Such 
a restoration of the standard seldom requires any action of the 
government ; it is the voluntary and united act of the whole 
people, having been dictated by the necessities of the case. 

The immediate consequences of this reversion to a specie cur- 
rency are in striking contrast with the results, already noticed, of 
the first issue of Paper Money and its gradual depreciation. The 
latter seemed to animate industry and commerce, to relieve the 
pressure of debt, and to supply abundant funds for industrial 
enterprises ; but the former seems to carry the community back, 
by a cruel revulsion, to worse evils than those from which it had 
apparently been rescued. It is the state of collapse that some- 
times foUows the excitement and delirium of a fever. It is now 
seen that the issue of Paper Money was really a desperate meas- 
ure, and that the prosperity which it caused was temporary and 
fallacious. As money rises from a low valuation to a higher one, 
wages are depressed, prices fall, trade stagnates, and bankruptcies 
become numerous; and these evils are the more serious, as the 
depreciation was great, and the revulsion sudden. Formerly, it 
was the creditors who were injured, being obliged to receive pay- 
ment in a cuiTency less valuable than the one in which the debt 
was contracted ; now the debtors, who are more numerous and 
less able to bear losses, must suffer harm and wrong, being re- 
quired to pay more than they received, and to do this at a time 
when, from the depression of wages, the abandonment of indus- 
trial and commercial undertakings, and the fall of profits, they are 
least able to bear an additional burden. AU these hai'dships are 
summarily attributed to one cause, more frequently spoken of 
than understood, — "a scarcity of money " ; it means only a higher 
real value of money, the prostration of credit, the consequent 
inactivity of capital, and general despondency. 

As the prosperity growing out of the earlier part of the experi- 
ment with Paper Money strengthened the hands of the revolu- 
tionary government, so the disasters and suffering attendant upon 
its close create a reaction, and weaken the cause of the insurgents. 



346 PAPER MONEY. 

The popular discontent thus generated tends either to the re- 
establishment of the old form of government, or to anarchy. 

It was so at the close of the Revolutionary war in this country, 
when both the people and the army, exhausted by the efforts and 
sacrifices which they had made, bankrupt in fortune, and seeing no 
resources open to them, were for a while on the point of turning 
their arms against each other. Nothing but the moderation, wisdom, 
and firmness of their great Commander-in-chief saved the country 
from the horrors of a military usurpation. The establishment of 
peace seemed only to render matters worse. The courts then be- 
gan in earnest to enforce the settlement of accounts and the pay- 
ment of debts J and the property seized for this purpose being sold 
at a great sacrifice, its former owners found themselves homeless 
and penniless, and still burdened with the greater part of their 
pecuniary obligations. The unthinking multitude then began to 
clamor for " stop-laws," or enactments to delay process and execu- 
tion after judgment had been obtained for debt ; for " tender-laws," 
compelling the creditor to accept in satisfaction of his claim any 
property of the debtor at a fixed valuation or appraisement, instead 
of offering it at auction for cash, when it would bring but a trifle ; 
and above all, for a new and large issue of Paper Money, the rapid 
depreciation of which would enable debtors to get rid of their obli- 
gations on very easy terms. Several States were weak enough to 
yield to these demands, and thus only prolonged the period of un- 
certainty, confusion, and suffering, besides aggravating the evil by 
injustice. Massachusetts resisted, seeing that really the best and 
easiest mode of escaping present difficulties was to adhere resolute- 
ly to a specie currency, and to enforce a speedy settlement of all 
outstanding claims, so that industry and commerce might at last 
revive, without further impediment or drawback from the past. 
The consequence was, that a formidable rebellion broke out in the 
State in 1786, the avowed object of the insurgents being to close 
by violence the courts of law, thus putting a stop to legal meas- 
ures for the collection of debts, and to compel the government to 
make a fresh issue of depreciating currency. The insurrection was 
suppressed with difficulty, and the terror which it inspired had 
this indirect good result, — that it animated and strengthened the 
general effort which was then made to create a stable government 
for the whole Union. This effort led to the adoption of the 



PAPER MONEY. 347 

Federal Constitution, one article of which, as already noticed, pro- 
hibits the individual States from emitting " bills of credit " or 
enacting "tender-laws." 

In France, the final abandonment of the depreciated assignaU 
and mandats, and the difficulties in which the government was 
thus involved, had consequences equally serious. The sufferings 
of the people exasperated them alike against the Revolution and 
the authors of it, whom they had so recently followed into the 
wildest excesses of Jacobinism. A reaction took place in favor of 
the ancient dynasty, which was so general, that the royalists ob- 
tained the command of the elections, and seemed likely to obtain 
their end by a peaceable vote of the two Councils or legislative 
assemblies. The Directory, indeed, aided by the army, which was 
still republican in sentiment, prevented this result through the 
coup d'etat of 1797; they seized the leading royalist deputies, and 
sentenced them to deportation. But the triumph was dearly 
bought, as it marked the ascendency of military power, and fore- 
shadowed the dominion of Napoleon. 

This general review of the subject, which I have intentionally 
based upon historical facts more than upon abstract reasoning, 
will enable us more clearly to understand the causes and conse- 
quences of the great emission of Paper Money in this country 
during the war of the Great Rebellion. Early in 1861, the cur- 
rency of the United States consisted of about 200 millions of 
dollars in bank-bills issued by the State Banks, over 90 millions 
of specie held as a reserve by these Banks, and probably 150 
millions more of specie in active circulation or of bullion in 
transitu seeking a market. Deducting the portion held by the 
Confederate States, the circulation at the North probably con- 
sisted of 150 millions in bank-bills, and perhaps an equal sum in 
specie. The anxiety and gloom created by the outbreak of the 
war produced at first a great depression of trade, a fall of prices, 
a restriction of credit, and a general hoarding of gold and silver 
coin. But soon the immense requisitions of the government for 
the supplies and munitions of war gave a stimulus to manufac- 
tures and commerce, and created a great demand for loans. This 
demand could not be safely met so long as the banks were likely 
to be crippled in their resources through the withdrawal of specie 
for the purposes of hoarding and export. Accordingly, by general 



348 PAPER MONEY. 

consent, the banks and the government suspended specie payments 
on the 1st of January, 1862 ; and a few weeks afterwards, Con- 
gress authorized the Secretary of the Treasury to issue 150 mil- 
lions of national currency (greenbacks) in denominations not less 
than five dollars each, to be legal tender for all public and private 
dues, except duties on imports and interest on United States 
bonds, both of which were to be payable in coin. Whatever 
portion of this currency came back to the Treasury, in loans or in 
payment of taxes, might be reissued. 

This was a moderate and judicious measure, fully justified by 
the exigencies of the case. It was only securing to the whole 
people, to whom it rightfully belonged, the advantage of a heavy 
loan without interest. The sum authorized was not excessive, for 
it only restored prices to their former level through filling up, by 
the emission of Paper Money, the gap caused by the withdrawal 
of specie for hoarding. Hence the depreciation which ensued was 
but slight, the premium on gold not exceeding three or four per 
cent till the next summer. The issues of the State Banks, more- 
over, had become illegal, because they were no longer redeemable 
in specie; and they were inconvenient, as they formed only a 
local currency, while the Paper Money of the government circu- 
lated freely, with uniform value, over the whole country. The 
Bank circulation ought, therefore, to have been taxed so heavily as 
to compel its speedy withdrawal ; and then probably 300 millions 
of greenbacks might have been issued without perceptibly in- 
creasing the premium on gold. These 300 millions would have 
been added to the resources of the Treasury without interest or 
cost to anybody, and even to the advantage of the national trade 
and industry. 

Unfortunately, the State Banks were allowed not only to con- 
tinue, but to increase, their issues, while- the enormous expendi- 
tures for the army and navy soon emptied the Treasury. Instead 
of negotiating a loan by consenting to sell government stock, if it 
were necessary, below par, the Secretary called for more Paper 
Money. Congress complied, and in July, 1862, sanctioned the 
emission of another 150 millions of greenbacks. Over one third 
of this sum was to be in bills of some denomination less than $ 5 ; 
but fractional currency, or bills smaller than one dollar, were 
expressly forbidden. Thus 300 millions of national currency were 



PAPER MONEY. 349 

added to the 200 millions of State bank-bills then in circulation, 
to do the work which had been performed by only 300 millions 
before the war. The consequences might easily have been pre- 
dicted. Gold immediately rose to a premium of 20, and, before 
the issue was complete, to one of 35, per cent. Specie went out 
of use altogether ; and the inconvenience caused by the want of 
small change compelled Congress (July 17) to authorize the issue 
of fractional cui'rency only six days after passing a law by which 
it was expressly prohibited. Through these small biUs, nearly 
30 millions of dollars were soon added to the volume of the cur- 
rency, thereby increasing its depreciation. Because the prices of 
commodities rose as the value of money fell, a fever of speculation 
was generated, and those who had any command of capital were 
turned away from investments in government securities to aU 
sorts of hazardous enterprises in trade. The rates of interest 
rose, and loans oould be obtained only on usurious terms. Mean- 
while the wants of the Treasury were constantly becoming greater 
and more imperative, owing to the gigantic character of the mili- 
tary operations then on foot, and the higher prices which had to 
be paid for personal services and for military and naval supplies. 

In January, 1863, Congress authorized the issue of 100 millions 
more of greenbacks, in any denominations not less than one dollar ; 
and the consequence was, within a fortnight, that the premium 
on gold rose to more than 50 per cent. Under the enhancement 
of prices thus produced, the expenditures on the war became inor- 
dinate, and means had to be devised for raising 900 millions to 
meet the wants of the Treasury for the current year. More cur- 
rency was still the Secretary's chief reliance, because he cherished 
the vain hope that money would thereby be rendered so plentiful 
tliat the heavy government loans would eagerly be taken up. A 
new sort of Paper Money was invented for the occasion.- Treas- 
ury notes were to be issued to the extent of another 400 millions, 
in denominations not less than $10, which should both bear inter- 
est at 6 per cent and be legal tender. The interest was payable 
in currency every six months, and the bills were to be legal 
tender /or their face value only, excluding the accrued interest. The 
expectation was, that the notes would thus be kept back from cir- 
culation, since they could not be used as money without a loss of 
interest. But this novel form of irredeemable currency proved 



350 PAPER MONEY. 

to be the worst that was ever issued. First, it threw away the 
only advantage derived from issuing Paper Money at all, — that 
of obtaining a compxilsoiy loan without interest. Secondly, on 
its first issue, and for months afterwards, it had just as much 
influence as greenbacks in augmenting the premium on gold and 
the prices of commodities; and though then withdrawn from 
active circulation for a few weeks, it was suddenly thrown back 
on the market in great quantities after six months' interest on 
the notes had been received, thereby causing prices to oscillate 
more wildly than if the currency had continued steadily in use. 

In the same week in which this new form of Paper Money was 
authorized. Congress also passed the law establishing the National 
Banking system, which had been strenously advocated for two 
years by the Secretary of the Treasury, and would greatly in- 
crease the volume of the currency as soon as it could be put 
in effectual operation. Under the stimulus of these two measures, 
gold immediately rose to 70 per cent premium ; thus showing that 
a dollar in paper was worth not quite sixty cents in coin. For- 
tunately, this very depreciation of the currency, because it much 
increased the actual, though not the nominal, rate of interest on 
United States bonds, caused the government loans to be rapidly 
taken up, thus supplying the wants of the Treasury and post- 
poning for eight or ten months the threatened emission of this 
interest-bearing currency. This curious result was entirely unex- 
pected by those who then had the management of the finances, 
though it admits of an easy explanation. " Success quite beyond 
expectation," says the Finance Pteport for 1863, " crowned the 
efforts of the Secretary to distribute the Five-twenty bonds in 
all parts of the country, as well as every other measure adopted 
by him for replenishing the Treasury." This surprising good 
fortune was attributable simply to the fact, that he actually sold 
the bonds at about 36 per cent discount, and paid interest on 
what he received for them at rates varying from 9 to 10 per cent 
in coin. 

As far back as February, 1862, Congress had authorized the 
creation of a debt of 500 millions, payable in not less than five, 
and not more than twenty years, {hence popularly called Five- 
twenties,) and bearing 6 per cent interest payable in coin. The 
bonds were also to be free from taxation either by State or 



PAPER MONEY. 351 

municipal authority. These might be issued and sold either for 
coin or greenbacks "at their market value," that is, for what- 
ever price might be obtained for them. But the Secretary pre- 
ferred the easy expedients of issuing Paper Money, certificates of 
indebtedness, and other forms of temporary but compulsory loan, 
and made no vigorous effort for more than a year to dispose of 
the Five-twenty bonds. " Still more greenbacks ! " was the cry 
of the official financiers ; and under the stimulus thus given to 
gambling in stocks and wild speculations in trade, capital was 
diverted from investment in government secui'ities, and during 
sixteen months only one third of the great loan was negotiated. 
Yet Mr. Fessenden's Finance Report, so late as December, 1864, 
argued in favor of yet more Paper Money, that " its scarcity in 
the market had occasioned no slight embarrassment in the nego- 
tiation of loans " ; and that " the impetus given to trade of every 
description by the large and increasing wants of government re- 
quired a largely increased amount of the circulating medium." 
It was really a matter of national shame that a First Minister of 
the Treasury for a great commercial and manufacturing country 
could be found thus ignorant of the first principles of financial 
and economical science. 

Mr. Chase, indeed, throughout his administration of the Treas- 
ury, seems to have entertained a great dislike of selling any gov- 
ernment stock at a price ostensibly below par. He preferred the 
indirect policy of first depreciating the currency, and then sell- 
ing, at nominal par in depreciated paper, a stock bearing 6 per 
cent interest in gold ; — as if it made any difference whether he 
sold a one-hundred-dollar bond for 64 specie dollars, or for 100 
paper dollars each worth only 64 cents in coin. Throughout the 
four years of civil war, a period so disastrous to the finances of the 
country, the Treasury never issued stock at a higher nominal rate 
of interest than 7.3 per cent, and never sold any of it at less than 
nominal par. During the five months preceding July, 1863, the 
premium on gold varied from 40 to 72 per cent. Taking 56, 
the mean of these two numbers, as a rough approximation to the 
average premium, we have, for the average value of the paper 
dollar during these five months, about 64 cents in coin. For 1 70 
millions of 6 per cent stock sold, therefore, the government re- 
ceived less than 109 millions, and on this amount it is still paying 



352 PAPER MONEY. 

interest at 9.37 per cent, and will probably soon redeem the prin 
cipal at par in gold. 

This was bad enough ; but it became still worse a year later 
when a continuance of the same policy raised the average pre- 
mium on gold for some months to 140. For 100 millions of 6 
per cent stock then sold, but little over 40 millions were received, 
and the Treasury really paid over 16 per cent interest for the 
loan. Still it might be urged that this was not any worse than 
borrowing undepreciated money, and paying for the use of it 15 
per cent a year. True, the amount annually paid for interest 
would be the same. But the expenditm-es of the government — 
the amount which the Treasury needed to borrow — would not be 
the same. To depreciate the currency is to raise the price, not 
merely of gold, but of all commodities whatsoever. When gold is 
at or near par, it costs, we will suppose, 500 millions a year, be- 
sides the avails of the taxes, to meet all the exigencies of the war ; 
and the public credit may be so low that a loan of this sum 
cannot be had except at 15 per cent interest. But after the end 
of the war, the country will be only 500 millions in debt for this 
year's expenditures ; and the re-establishment of the public credit 
by the return of peace will soon enable the Treasury to obtain a 
loan at 6 per cent, or less, wherewith to pay off the debt incurred 
at exorbitant rates. But if Paper Money enough be issued to 
raise the price of gold to 250, the excess of war expenditures for 
the year will be, not 500, but 1250 millions. This sum at 6 per 
cent will cost just as much annually, during the war, as 500 mil- 
lions at 15 per cent ; namely, 75 millions. The public debt will 
then be two and a half times as great as in the other case, and no 
reduction of the interest will be possible. Five years have 
elapsed since the restoration of peace, and United States 6 per 
cent stock is still considerably below par in the market, chiefly 
because we are still using a depreciated and fluctuating currency. 

It is an obvious truth that " a high rate of interest prevents an 
outflow, and induces an influx, of that commodity which is most 
convenient for transmission from one country to another, name- 
ly, gold." With gold at 170, as it was in the beginning of March, 
1863, the real interest offered on the bonds was over 10 per cent. 
As this rate was high enough to attract both domestic and foreign 
capital into even a hazardous investment, the government loan 



PAPER MONEY. 353 

began to be rapidly taken up ; and before the end of March, over 
two millions were sold in one day. This relieved the wants of 
the Treasury for a time, and also brought gold from abroad and 
out of hoards, so as to depress the premium on it and to lower 
prices generally. And the impulse being once given, the fall 
accelerated itself This very depression of prices had the effect 
to discourage speculative enterprises, and thereby to turn unem- 
ployed capital towards the Treasury, which was still offering about 
9 per cent interest. Before November, 1863, the whole loan of 
500 millions had been taken up, and, what was a still more im- 
portant result for the national finances, the emission of the newly 
invented interest-bearing Paper Money hud been thus far post- 
poned. This was the simple phenomenon which struck the offi- 
cials of the Treasury with so much surprise. For a few weeks, 
the bonds could hardly be printed fast enough to supply the de- 
mand. But the triumph did not continue long. 

As to paper currency which should both bear intei'est and be 
legal tender for its face value, not including accrued interest, its 
inventors failed to perceive, that even the portion of it which is 
withdrawn for a time from active circulation, to be kept in reserve 
as an investment, may still exert great influence on prices through 
the stimulus which it gives to speculation. As Price depends on 
the ratio of Demand to Supply, whatever tends to augment both 
the disposition and ability to purchase must enhance the Price. 
In the wholesale trade, purchases are usually made on credit, the 
buyer depending upon the resale of the goods on a future day, at 
an advanced price, in order to effect the payment. Such purchases 
are more numerous, and are effected with greater confidence, ac- 
cording as the buyer feels more sure that he will be able to pay, 
even if the price should not rise, and if he should deem it expedi- 
ent to keep the goods a longer time on hand, waiting for a favora- 
ble turn in the market. But he could not afford to provide against 
such a contingency by keeping proper cash funds in reserve where- 
with to meet the payments ; for he would thus lose the interest 
on the whole sum reserved. But these interest-bearing legal-ten- 
der notes answered the double purpose of an investment and a 
cash reserve. A good stock of them might be kept on hand with- 
out expense, as a fund available against the worst that might hap- 
pen. The possession of such notes, therefore, even if he hopes not 
S3 



354 PAPER MONEY. 

to be obliged to part with them, must increase the purchasing power 
of the merchant, and, by tempting him to increase his speculative 
purchases, must enhance prices. In fact, I believe they are the 
most efficient form of Paper Money ever invented to produce this 
very result. They are at once both Capital and Money. 

The wants of the Treasury recurring after the 600 millions' loan 
had been taken up and its proceeds expended, instead of attempt- 
ing to negotiate another loan, the Secretary had recourse to this 
new sort of currency. The form adopted was that of legal-tender 
notes of various denominations not lower than $10, to be re- 
deemed in one or two years, with coupons attached for 5 per cent 
interest payable every six months. About 150 millions of them 
were issued in the autumn of 1-863 and the following winter. 
The consequence was, as already remarked, that though partially 
held back from circulation for a time, while the interest was ma- 
turing, yet as soon as six months had elapsed, so that the holder 
could cut off a coupon, they were rushed upon the market in great 
quantities. Hence, 1, They inflated the currency just as much as 
other Paper Money ; 2, They were costly, as interest had to be 
paid on them ; 3, They caused the circulation to vary in amount 
spasmodically, or by jerks ; the premium on gold, and the prices of 
other commodities, varying under their influence sometimes as 
much as 40 per cent in ten days. These evils became so intolera- 
ble on the expiration of the first six months after their issue, — 
that is, from the middle of June, 1864, — that an effort was made 
to withdraw the whole emission, and about 90 millions of them 
were actually obtained and cancelled. But as the speculative 
fever generated by their issue had made the negotiation of loans 
impracticable, the necessities of the Treasury continued, and the 
Secretary was obliged to replace, early in the autumn, nearly the 
whole quantity that had been destroyed. Then a new form of 
these notes was adopted. The interest was raised to 6 per cent 
and compounded semiannually, but made payable, together with 
the principal, only after the lapse of three years. After some 
months, of course, these could not be paid out as Money without a 
heavy loss of interest ; but though held in reserve, as already ex- 
plained, they fostered speculation, by supporting hazardous pur- 
chases, as much as if they had been in active circulation. Over 100 
millions of these compound-interest notes were issued before the 



PAPER MONEY. 355 

end of September, 1864. Before another year had expired, over 
200 millions of them were in circulation. Thus the government 
and the people were taxed the usurious rate of 6 per cent compound 
interest on these many millions, as a compensation for the privilege 
created by them of paying vastly enhanced prices on every com- 
modity in the market. 

For a vivid picture of the evils thus produced, consult the Chart 
showing the fluctuations of the premium on gold for the six months 
following May, 1864. Within one week we find the price of gold 
at 218, then at 280, and again at 226. Of course, under the stim- 
ulus thus given to prices, a mad fever of speculation seized upon 
the public, as violent as that produced by the South Sea bubble 
in England or by Law's Mississippi scheme in France. Trade be- 
came mere gambling. Every one who possessed, or could beg, 
borrow, or embezzle, a few thousands, rushed to the market to buy 
gold, stocks, commodities, — anything at any price ; for an ad- 
vance in gold might, within three days, give them back their in- 
vestment with 30 per cent profit. Even if a fall in gold should 
bankrupt them, they had no cause to grieve, as they would have 
enough companions in calamity to keep them in countenance, and 
within a week they might try again. Under such circumstances, 
no one would lend any money to the government, although the 
Treasury, at what was then the premium on gold, was ofifering 15 
per cent interest, and ultimately to repay two dollars for every 
one dollar received ; even these inducements seemed pitifid in com- 
parison with the rich harvests that might be obtained in the 
stock-market. 

For any of these evils Congress and the Secretary of the Treas- 
ury had no remedy to offer except the insensate one of passing in 
hot haste, on the 17th of June, a bill constituting it an offence 
punishable with fine or imprisonment to make any bargains rela- 
tive to the purchase of gold except on terms of immediate delivery 
and cash payment. This was an attempt, as any Economist might 
have told them, to put out a conflagration by pouring on it oil and 
turpentine. The statute merely added to the premium on gold 
the cost of insurance against the heavy penalty that might be 
incurred by speculating on its price ; it raised this premium 33 
per cent in just five days. The oscillations then continuing more 
Avildly than ever, the law had to be repealed in less than three 
weeks after its enactment. 



356 PAPER MONEY. 

The signal failure of this measure seems at last to have dis- 
couraged one who had hitherto stoutly maintained his position 
through a long train of mishaps and disasters. On the 30th of 
June, with gold at 280, and pending an unsuccessful attempt to 
negotiate a petty loan of only 33 millions, the Secretary of the 
Treasury resigned. It was high time to try whether a change of 
financial policy might not relieve the government and the country 
from some of the evils which were now impending. Mr. Fessenden 
reluctantly consented to take the ofi&ce which few were willing to 
accept. 

Late in the summer of 1864, the very magnitude of the evil 
produced by the great depreciation of the currency wrought its 
own cure, as it had done the year before. Through its indirect 
effect in augmenting the rate of interest payable on bonds bearing 
interest in gold, it tempted foreigners to make large investments 
in these securities, and thereby threw upon the market large 
amounts of gold and bills of exchange drawn against the proceeds 
of United States stocks sold at Frankfort. German capitalists were 
willing to incur some risk in an investment which offered from 15 
to 17 per cent, or nearly four times their ordinary rate of interest. 
The American market was thus glutted with specie and specie 
funds; and this produced, of course, a great decline in the pre- 
mium on gold, and indirectly in the prices of all commodities 
which could be purchased with gold abroad. This phenomenon 
was rather a depreciation in the value of gold than a rise in that 
of the paper currency. A panic ensued. Hoards of the precious 
metals were again broken up and thrown upon the market, and 
the price of gold fell from 280 in July to 190 in October. The 
price of goods generally was more depressed even than that of 
gold, and many failures took place. 

Such are the consequences of an excess of Paper Money, — ex- 
citement, feverish speculation, inordinate enhancement of prices, 
and then reaction, a sudden decline in the markets, and numerous 
bankruptcies, the whole cycle of these events being completed in 
less than three months. The reaction would doubtless have gone 
farther, if what was now the exorbitant cost of supplies for the 
army and navy had not compelled the Treasury to reissue the 
legal-tenders that had been withdrawn, and even to supplement 
them by the emission of another 100 millions of compound-interest 



PAPER MONEY. 357 

notes. The fall was thus arrested, and gold rapidly advanced 
again, till it reached 260 in November. The new Secretary was 
puzzled by this result, and, in his Report for 1864, affirmed that 
"the solution of the problem may be found in the unpatriotic and 
criminal efforts of speculators, and probably of secret enemies, to 
raise the price of coin " ; and as if determined to repeat the 
former errors, he advised the passage of "a law providing for 
the exemplary punishment of combinations for such a purpose." 
As to the nominal " sales of gold upon time," which are here com- 
plained of, they are nothing more than betting upon the price of 
gold at a future day ; and to attribute to them any inflvience 
either way upon the depreciation of the currency is about as ab- 
surd as it would be to accuse those silly persons who bet upon the 
future state of the weather of a conspiracy to bring about a drought 
or a deluge. As Mr. Newcomb remarks, the idea seems to be 
" that every one bets against the government, and no one for it ; 
or, at least, that he who bets for it is powerless. But for every 
bull there must be a bear ; the bear will have as great an interest 
in the fall as the bull in the rise," and his exertions for this end 
will be as strenuous and effective as those of his opponent. " Bull 
and bear are, in fact, equally powerless to effect any great or per- 
manent change in the price of so universal and easily transportable 
an article as gold. At best, they can only foresee the change. 
The stock-market registers the price of gold, but does not fix it." 

This history of the emission of the Paper Money need not be 
carried firther. It only remains to show that the facts corre- 
sponded with the theory, as to the effects which an excessive 
issue must have upon the loan-market. It has been shown, 
that the very excess of the currency which raises the prices of 
commodities is wholly absorbed in maintaining this rise, so that, 
although there are twice as many dollars in circulation, there are 
also twice as large exchanges to be effected by them, no surplus 
then remaining for loans. Moreover, the quantity of Capital is cer- 
tainly not augmented by the excessive issue of mere engraved bits 
of paper ; but the direction of the Capital which was previously 
in the market seeking investment is changed ; it is diverted from 
government loans to hazardous speculations in trade and stocks, 
being attracted by the chance of higher profits. The sure pros- 
pect of a contraction of the currency operates, so to speak, at both 



358 PAPEK MONEY. 

mds, or by a double chance of profit, to induce every person to 
exchange any form of merchandise, or other property, into an 
investment in a government loan; since he will thereby both 
avoid an otherwise inevitable loss on his merchandise, and secure 
a gain on his United States stock. Take, for instance, the Treas- 
ury notes bearing 7.30 per cent interest in currency, which were 
popularly called Seven-thirties. We will suppose that a merchant 
holds $50,000 worth of manufactured cotton at a time when gold 
is at 200. The certainty that the price of gold would fall 20 
per cent in a week would make him eager to dispose of his 
goods, in order to avoid the threatened loss of $10,000 by the 
corresponding fall in the price of cotton. Moreover, the real or 
gold value of the interest to be received for his $50,000 invested 
in Seven-thirties, instead of being only $1,825, as it would be 
with gold at 200, would be raised, by this decline of gold rela- 
tively to Paper Money, to $2,028. The difference between 
these sums is $203 of annual income in gold, representing about 
$400 income in currency ; and this amount, capitalized at 6 per 
cent, represents a principal of $6,666. Adding this gain to the 
loss avoided by the sale of the cotton, we have $16,666 of gain, 
or avoided loss, as the inducement offered, by a foreseen decline 
of 20 per cent in gold, to sell out merchandise and invest in 
government securities. 

On the other hand, the expectation that gold would very soon 
rise in value 20 per cent would tempt the dealer to hold the 
cotton in order to realize on it a profit of $10,000; while he 
would also be deterred from buying bonds, by perceiving that the 
gold income from them would decline from $1,825 to $1,460, 
the difference between these incomes representing (calculated as 
before) a capital of $12,166 in currency. Hence this expected 
rise of gold would hold out the lure of $22,166, saved or gained, 
as an inducement to keep the cotton instead of buying govern- 
ment stock. 

Observe, however, that these calculations can be made, and 
these inducements will exist, only when we are enabled to foresee 
with reasonable certainty that the rise or fall in gold will take 
place. Anybody can be wise after the event, and can perceive 
how he might have made a great deal of money ; but such wisdom 
does not count for much in financial operations. But the fact 



PAPER MONEY. 359 

that the government is avowedly expanding the currency by fresh 
issues of Paper Money does afford full assurance that the price 
of gold will rise; while the knowledge. that the government is 
contracting it, by cancelling legal-tender notes, must satisfy every 
one that this price will fall. Hence, loans will be readily taken 
up in the latter case, and will be declined in the former. 

These conclusions and calculations are fully confirmed by the 
facts recorded on the Chart. At any period when this shows that 
the price of gold was advancing rapidly, or, being already high, 
was oscillating much, we shall find that loans were obtained by 
the Treasury either with great difficulty, or not at all. But when 
the gold premium was falling, or had recently suffered a great 
decline, then public stocks advanced, and subscriptions to new 
loans were quickly filled. Look, for instance, at the summer of 
1864, when the price of gold had shot up, between May and 
July, from 180 to 280. At this time, the subscriptions both to 
the 7.30 and the 10-40 stocks (the latter being payable in not 
less than ten, nor more than forty, years) were reduced to a mere 
fraction of their former amount, and a proposed loan of only 33 
millions had to be withdrawn because there were no bidders. 
But in the next September, when gold fell to less than 200 again, 
subscriptions steadily increased, and, by the 1st of October, they 
amounted to over a million a day. The action of Secretary Fes- 
senden, in throwing upon the market at this critical time over 100 
millions of additional legal-tender compound-interest notes, sent 
the premium up again, in November, nearly to its former highest 
point, and once more the loans found but few bidders ; and this, 
too, in spite of a long train of uninterrupted military successes. 
A few months later, commenced that unparalleled fall in the value 
of gold, which, in six weeks, without any appreciable harm to the 
mercantile world, carried the countiy over more than half the in- 
terval, which, on the 8th of February, 1865, separated it from a 
resumption of specie payments. On that date, the premium was 
at 114; while on the 24th of March, it was at 50. During this 
interval, the government borrowed larger suras, at lower rates of 
interest, than in any period of equal length during the war. The 
decline in the value of gold, continuing to the middle of May, 
caused that marvellous subscription to the Seven-thirties, a mere 
currency-bearing loan, which, in four or five months, poured 830 



360 PAPER MONEY. 

millions into the Treasury, and relieved the Secretary from all 
necessity of borrowing another dollar before the opening of 
a new year. 

Hitherto we have considered the effects of an excessive issue 
of Raper Money only upon the morality of trade on a large scale, 
and upon the finances and credit of the government. It has a 
still more considerable and pernicious influence on the interests and 
the rights of the bulk of the community, who, as mere producers 
and consumers, are not directly concerned in the wholesale trans- 
actions of commerce, or in the complications of the stock-market. 
The practical matter for them was, that the prices of all articles 
of consumption rose rapidly from the time when greenbacks were 
first issued in excess, till they were doubled, and at last nearly 
trebled, in the summer of. 1864, when the circulation considerably 
exceeded 600 millions, or was more than twice as much as the 
mixed specie and bank currency had been before the war. This 
increase in the cost of living was greater than the advance in the 
price of gold, — greater even than could be accounted for by the 
heavier rates of taxation. In December, 1865, Mr. McCulloch, 
then Secretary of the Treasury, observed that " rents, and the 
prices of most articles for which there has been a demand, have 
been, with slight fluctuations, constantly advancing from the com- 
mencement of the war, and are higher now, with gold at 47 per 
cent premium, than they were when it was at 185." Even 
five years after the close of the war, when the premium on gold 
had fallen to 20 per cent, the necessary expenditures of a family, 
including house-room and groceries, continued to be at least 75 
per cent larger than in 1860; and not more than half of the 
excess was fairly attributable to increased taxes. "Wages and 
salaries, moreover, did not advance in the same ratio with the 
prices of commodities ; during the war, indeed, except in a few 
employments which were exceptionally stimulated by the demand 
for the materials of war, they did not rise half as high even as 
the premium on gold. In all the relations of Labor with Capital, 
this long experiment of the use of Paper Money has resulted sadly 
to the disadvantage of the former. In the pithy language of Mr. 
Wells, it has made " the rich become richer, and the poor poorer." 

The suspension of specie payments made gold a mere com- 
modity, the price of which, like that of other commodities, de- 



PAPER MONEY. 361 

pended upon the ratio of the demand to the supply ; and, owing 
to peculiar circumstances, ever since 18G1, the supply of gold has 
been relatively greater in the United States, and the demand for 
it relatively less, than in any country in the world, so that it 
has been with us the cheapest of all commodities. The demand 
for it has been less, because it has not been used at all as money 
in the ordinary transactions of trade ; and the comparatively slight 
use of it by the government in the receipt of duties upon imports, 
and in the payment of interest upon bonds, has been abridged by 
lodging it in the Sub-Treasury, and effecting transfers of it by 
certificates of deposit. The supply of it has been greater, because 
the larger portion of what there was in the coimtry at the end 
of 1861 was retained here, and hoarded, throughout the war, by 
the timidity of the capitalists who were its owners ; because an 
additional amount of it was obtained every year from internal 
sources, such as California and Nevada ; because immense quanti- 
ties of it were brought hither from Europe, or lodged there sub- 
ject to American orders, in return for United States securities, 
and State and railroad bonds, sold abroad ; and because it is 
the most tempting of all subjects for speculation, owing to the 
ease with which large amounts of it are handled and transported, 
its freedom from all risk of injury while kept on hand, and the 
widely varying demand for it, at different seasons of the year, 
for the payment of duties or shipment to other lands. This 
excess of supply was not relieved, in the usual way, by additional 
imports attracted by the higher prices of commodities in this 
country, because gold, being demonetized here, did not directly 
affect prices in the markets, and because a high tariff, almost pro- 
hibitory on many articles, had much restricted foreign trade. 
Gold, therefore, has been for eight years the cheapest of all 
commodities in this country, and therefore the premhim on it has 
very imperfectly represented the depreciation of the currency. 
Only in this way can we account for the sudden and immense 
decline of that premium in the spring of 1865, though the prices 
of other commodities were then but little affected, and the paper 
currency, far from being contracted, was actually increasing in 
amount. There are now (1870) about 700 millions of paper in 
circulation ; yet prices generally are but little lower than they 
were four years ago, when we had over 900 millions of currency. 



362 PAPER MONEY. 

Various causes maj be assigned why the markets are not af- 
fected immediately, or iu the same ratio, as the amount of money 
in circulation. Time is required for a fresh issue of Paper Money 
to permeate all the channels of circulation, to reach all the mai*- 
kets of a vast country, and raise prices equally everywhere. Still 
more time is needed for prices to fall again when the currency 
is contracted, because the holders of goods, having more or less 
capital at command, are enabled to stand out against an immedi- 
ate reduction in value of their stocks on hand, hoping that the 
previous equilibrium may be restored. There is a vis inertioe, 
especially in the retail markets, which is not sufficiently taken 
into account ; competition is the equalizing power, and compe- 
tition cannot be quickly organized, or quickly be made to bear, be- 
cause, frequently, long and slow processes of production or importa- 
tion must previously be accomplished. As already remarked, prices 
and currency are not always at a level, but are always finding 
their level, and often have to go far and travel slowly in order to 
reach it. Prices are adjusted for any one time, not so much by 
what is, then and there, the ratio of the demand to the supply, 
as by the opinions of dealers respecting what the supply and 
demand will be some weeks or months ahead. An augmentation 
of the currency, if foreseen a few weeks before its occurrence, 
may be so far anticipated and exaggerated in its effect upon the 
markets, that a very considerable rise of prices may take place 
some time before the currency is increased at all ; and then, ow- 
ing to the reaction of disappointed hopes, the real increase, when 
it comes, may be contemporaneous with a considerable fall in 
prices. 

The relative value of particular commodities is often affected 
by special causes operating on them alone, wholly irrespective of 
the excess or deficiency of the currency. Thus, in the United 
States, breadstuffs are naturally and inevitably produced in excess, 
so that, as there cannot be two prices for the same commodity, 
their value in the home market necessarily depends upon the 
foreign price ; that is, on what can be obtained for that portion of 
the crop which must be sold abroad. Hence the price of grain 
and many other farm products has never, during the last eight 
years, varied proportionally with the excess of the currency, or 
with the prices of other commodities. The agriculturists, there- 



PAPEE MONEY. 363 

fore, who constitute full one half of our working population, have 
had more to pay and less to receive, ever since the suspension of 
specie payments, than any other class of producers. Their neces- 
sary expenditures for implements, repairs, wearing apparel, gro' 
ceries, taxes, and the like, have been more than doubled, while 
the receipts from the sale of their crops have been but little 
increased. 

A case of still greater hardship is that of the numerous class 
who are entirely dependent upon fixed incomes of moderate 
amount ; such as annuitants, mortgagees, persons who had let real 
estate on long leases, depositors in Savings' Banks, and recipients 
of dividends on bonds of old date, and on other permanent invest- 
ments. The number of dollars which each of these persons an- 
nually received was strictly defined and limited ; but the value of 
each of these dollars was arbitrarily reduced one half by the 
excessive issue of Paper Money. All salaried persons, also, in- 
cluding clerks, overseers, teachers, and clergj^men, suff"ered nearly 
equal wrong. As the demand for their services was not increased, 
and they could not go into other and better-paid employments, 
because their education and habits had unfitted them for a 
change, their salaries during the war were seldom increased at all, 
and never rose high enough to correspond with the increased cost 
of living. The injustice to both these classes was aggravated by 
the consideration, that the heavy and wrongful burden thus laid 
upon them, amounting in many cases to a privation of half of their 
incomes, produced no benefit to the government and the cause of 
the people, but served only to swell the gains of speculators in 
stocks and merchandise. 

Prices are enhanced, not merely by the depreciation of the cur- 
rency, but by its fluctuations in value, which impede legitimate 
enterprise in trade and manufactures, or allow it to proceed only 
under a heavy cost of insurance against the uncertainty of the 
returns. The price paid by the consumer must be large enough 
to compensate every party to the production and sale of the com- 
modity for the contingency of a general fall in values while it is a 
part of his stock on hand. The number of hands through which 
the article must pass before it reaches the consumer, and the 
length of time required for the transit, are often so considerable, 
and the chances of loss meanwhile, through the instability of the 



364 PAPER MONEY. 

markets, are consequently so great, that none will engage in the 
business but those who are tempted by the prospects of enormous 
gains, and who do not fear the disgrace of bankruptcy. More 
houses and ships are needed, for instance, since the construction 
of them was almost entirely suspended during the war ; yet only 
few are begun, because the cost of iron, lumber, and other ma- 
terials, is still so great, and it is hoped or feared that they will be 
cheaper a year hence. The consequence is, that rents are inordi- 
nately high, foreign ships monopolize the carrying trade, and 
carpenters, masons, shipwrights, and other artisans either cannot 
find employment, or must submit to work at lower wages. Books 
command inordinately high prices, yet only few are printed, not 
only because the cost of manufactiu'e is very great, but because 
the price of the book may fall one half before it can be completed. 
How can any prudent person engage in any large transaction of 
commerce, — for example, the importation of goods from a dis- 
tance, — the returns from which must be delayed for many 
months, when he has no means of determining with certainty that 
prices may not be elevated or depressed 50 per cent within a 
fortnight 1 

By throwing away the common standard of value, we have lost 
the corrective influence upon our own markets of the general mar- 
ket of the world. An almost prohibitory tariff is needed to check 
excessive importations, because the risk and cost of home manu- 
facture are so much enhanced. Prices here are no longer adjusted 
with close reference to their level in other countries, as goods can- 
not be imported or exported soon enough to take advantage of any 
great change in their relative values. Trade thus becomes a lot- 
tery ; one can only engage in it blindfold, with a sort of stoical 
and fatalistic resolution to abide the result, whatever it may be. 
The question between great wealth and bankruptcy is virtually de- 
termined by shutting the eyes and throwing the dice. Though 
such a mode of transacting business is condemned by every prin- 
ciple of sound morality, there is a strange fascination about it for 
a certain class of minds. The pleasurable excitement of a game 
in which property, reputation, and even life, are staked against the 
chance of a great fortune, will outweigh with many persons all that 
can be said against it. Recent events go to show that the gam- 
ibHng! spirit has pervaded and corrupted the commercial community 



PAPER MONEY. 365 

in our large cities to an extent never known before. It is evident 
that the state of the currency, since the suspension of specie pay- 
ments in January, 1862, has contributed more than any other 
single cause to this lamentable result. To this extent, the evil is 
within the reach of legislation ; and any act which will give sta- 
bility to our markets, by prohibiting the further use of any cur- 
rency not immediately redeexnable in coin, will do more to check it 
than all the terrors of the peuiteutiary or the gallows, — even if 
there should be virtue enough left in the community to apply these 
latter remedies. 

A still heavier discouragement to legitimate commerce results 
from that uncertainty about the fulfilment of contracts, which is 
caused by the fluctuating value of the dollar. Good faith in all 
mercantile transactions appeared so important to the founders of 
our government, that they inserted a clause in the Constitution of 
the United States, declaring that no State shall pass any law im- 
pairing the obligation of contracts ; and the strictness with which 
this prohibition has been enforced by the coiurts of law has done 
more than anything else to establish their reputation for equity, 
and to create confidence between man and man. But how wide 
departiu-es from equity are now sanctioned by a custom of eight 
years' duration, and by the act of Congress which made depreciated 
paper dollars a legal tender for the payment of any debt, whenever 
or however contracted, appears from two imaginary cases, like 
which there have been plenty of real ones, which are supposed by 
Mr. Newcomb to have occurred in 1864, 

Before the suspension of specie payments, "two hundred mechan- 
ics each put $100 into a Savings' Bank. The Savings' Bank after- 
wards loaned this $ 20,000 to a ship-builder, who employed it in 
building a ship. He sends the ship to England and sells her for 
$22,000 in gold, making ten per cent legitimate profit. By every 
principle of justice, $20,000 of the money belongs to the Savings' 
Bank. But now the legal-tender clause comes in, and declares the 
builder relieved from the debt on payment of 20,000 paper dollars. 
He therefore buys these paper dollars with perhaps $ 8,000 in gold, 
and keeps the additional $12,000 for his own private use. 

" A professional man, dependent entirely on his income for sup- 
port, insured his life, in order that his family might not be left 
penniless at his death. The Life Insurance Company loans the 



366 PAPER MONEY. 

money to Mr. Shoddy, who invests it in manufacturing capital, and, 
with the rise in gold, finds both his capital and profits apparently 
increase in a corresponding ratio. When his debt is due, he finds 
that he can sell one half his stock for greenbacks sufficient to pay 
it, he retaining the other half, though it also rightfully belongs to 
the Insurance Company." Then the professional man dies, and his 
widow and children receive from the Company just half the value 
which it had covenanted to pay them. 

And such acts are still declared by Congress and the courts of 
law — not as yet, however, by the Supreme Court of the United 
States — to be legal and equitable proceedings ! 

When the depreciation is considerable, an immediate restoration 
of the specie standard, even if it were possible, would be inexpedi- 
ent and unjust. A large sum in gold would be needed to redeem 
the outstanding circulation ; the sudden and considerable fall of 
prices would distress merchants and producers ; and debtors would 
suffer as much hardship and wrong as creditors did when the value 
of money was suddenly diminished. The reversion to specie pay- 
ments, therefore, ought to take place gradually, that it may cause 
no greater or more sudden alterations of values than those to 
which the community must be exposed so long as the use of Paper 
Money is continued. An admirable plan for this purpose was de- 
vised by Mr. Ricardo, and adopted by Mr. Peel and the English 
Parliament in 1819, as a means of providing for the restoration of 
specie payments by the Bank of England. The Bank was required 
immediately to redeem its notes in bullion, paying for them at 
first, however, a price but little in advance of what was then their 
market value as indicated by the premium on gold, but making a 
small addition to this price every few months, till the notes should 
tlius finally be brought up to par with specie. This scheme proved 
so successful, and the disturbance of the markets created by it was 
so slight, that the Bank of its own accord, with the general assent 
of the mercantile community, anticipated the period of full resump- 
tion, and began almost at once to redeem its notes at par. 

In January, 1870, the premium on gold in this country was 20 
per cent, so that the value of the paper dollar was a little over 83 
cents in coin. At the same time, there were over 100 millions in 
gold lying idle in the Sub-Treasuries, and probably another 100 
miUious in the banks and the hands of the people. Congress then 



THE NATIONAL BANKING SYSTEM. 367 

might safely require the Treasury and the banks to redeem in 
specie all the paper currency that should be offered at the rate of 
85 cents for the dollar, and to advance this price 5 cents on the 
dollar every six months. Full specie payments would thus be 
restored in eighteen months ; and, meanwhile, the value of the cur- 
rency would be nearly as free from injurious fluctuations as if the 
resumption were complete and immediate. There could be no sud- 
den or considerable demand for gold, as every one would see that 
delay in the presentation of the notes would be compensated at 
the rate of 10 per cent a year. Confidence in trade and stability 
in the markets would be at once established, since contracts could 
be made with as full a knowledge of what the value of money 
would be when the time of settlement came, as if the currency 
were already convertible into specie at its full nominal value. 
Neither debtors nor creditors could be harmed as much as they are 
by the continuance of the present state of things ; since the maxi- 
mum of change in the value of the dollar would be five per cent 
every six months, which is not half as great as was the fall in gold 
in less than two months, in the autumn of 1869, or one tenth as 
great as the fall in the spring of 1865. 



CHAPTER XVI. 

THE NATIONAL BANKING SYSTEM. 

The law establishing the National Banking system throughout 
the United States was passed l.y Congress on the 25th of Febru- 
ary, 1863. It may be doubted whether a period in the midst of a 
terrible civil war, a derangement of all the machinery of commerce, 
and a general confusion of the finances, is a fit time to try experi- 
ments in banking and to revolutionize the whole credit system 
of the country. An experiment made under such circumstances 
proves nothing. Whether its immediate results are seemingly fa- 
vorable or adverse, we can never tell whether they are the proper 
consequences of the new system, or of the wholly exceptional 
Btate of affairs under which it was first put in operation. Besides, 
such times are not favorable for deliberation, for collecting the 



368 THE NATIONAL BANKING SYSTEM. 

facts and arguments by which it must be judged whether it is ex- 
pedient even to make the trial. If, indeed, the scheme were only 
a war measure, intended only to bridge over the pressing difficulties 
of the hour, and to die a natural death when the termination of 
hostilities should restore the affairs of the country to their old 
footing, or place them, at any rate, on something like a permanent 
basis, this objection would not be valid. 

Unluckily for the pretensions of the bill as one of immediate 
lu'gency, an entirely novel banking system for the whole United 
States is an invention which, from its very nature, cannot pass 
into immediate use. In this case, it had hardly begun to be 
organized, though already over two years old, when the war was 
over. A great war is the very time for making trial of newly 
invented cannon and iron-clad ships ; but it is no more a proper 
season for experimenting with a new banking system than with 
a new religion. Yet because introdxiced at such a period, and 
pressed, though without any good reason, as a war measure, it 
was passed almost without debate. The responsibility of the 
measure rests almost exclusively upon the Secretary of the Treas- 
ury, who urged the scheme in three successive annual reports, but 
in the last one was obliged to confess, that, although nearly ten 
months had elapsed since the passage of the law, not a dollar of 
the new cuiTency was yet ready for emission. 

The leading features of the law were, the transfer of the whole 
banking system of the country from the control of the State 
legislatures to that of Congress, and the issue by the banks, and 
for their own profit, of 300 millions of dollars of a uniform na- 
tional currency, secured by pledge, and deposit in the Treasury, 
of a somewhat larger amount of United States stocks or bonds. 
Any number of persons, not less than five, may form a banking 
company, the stocks pledged by them must equal at least one 
third of their capital, and the total of their circulating notes must 
not exceed their capital, which must be at least $ 50,000 in small 
towns, and at least $100,000 in those of larger size. Each stock- 
holder is personally liable to twice the amount of his shares for the 
debts of the company. The existing State banks were encouraged 
to reorganize themselves under the new scheme, and the extinc- 
tion of their former local currency was insured by the imposition 
upon it of a prohibitory tax of 10 per cent, to take eflPect after the 



THE NATIONAL BANKING SYSTEM. 369 

let of July, 1866. The alleged advantages of the scheme were 
the substitution of a uniform and well-secured national currency, 
in place of the heterogeneous local currency of the State insti- 
tutions, and the supposed additional facilities given for the ne- 
gotiation of national loans. 

To one familiar with the histoiy, at least with the unhappy end, 
of the two Banks of the United States which, at different times, 
were established and existed in this country for long periods under 
national authority ; especially to one who remembers the long bank- 
war, as it may be termed, which raged from 1832 to 1842, the 
fierce political dissensions and commercial disasters to which it 
gave rise ; — to one who remembers all this, the project of taking 
away all the banks in the country from the avithority of the individ- 
ual States, and placing them under the control of Congress and the 
Secretary of the Treasury, will not appear a very promising one. 
And the proceeding will appear still more ominous when it is re- 
membered, that each of the former banks of the United States 
existed under a specific charter from Congress, which was unalter- 
able during the years of its continuance, so that, for this period at 
least, the institution was free from legislative interference ; where- 
as the National Banking system, declared in the act itself to be 
subject at any time to amendment, alteration, and repeal, was 
tinkered in some of its main features when it was but little over a 
year old, tinkered again in less than a year more, and is likely to 
be a whetstone for Congressional debate and intrigue, and an 
object for the caprice of every Secretary of the Treasury, for many 
years to come. Carefully enshrined in the system is the worst 
feature of the exploded " pet-banks," the authority granted to the 
Secretary to make his own selection of those which are to be 
depositaries of the public money. Of all evils which may befall 
banking institutions, in reference to the interests, either of their 
stockholders, or of the mercantile community at large, for whose 
benefit they are created, the most to be deprecated is frequent 
legislative interference. Here, if anywhere, the Political Econo- 
mist is entitled to repeat his favorite maxim : Laissez faire, — let 
things be. Banks are governed too much. Better even a bad sys- 
tem than the perpetual change which amounts to no system at all. 

Since 1842, questions about banking having ceased to be agi- 
tated in Congress, politicians no longer waged war upon the subject, 
24 



370 THE NATIONAL BANKING SYSTEM. 

and each State quietly developed and improved its own system, 
chiefly under the guidance of merchants, bankers, and other prac- 
tical men. These systems, in the main, worked well ; the banks 
in New England, the Middle, and even the Southern, States were 
generally prosperous and well-conducted institutions, and recov- 
ered, with quickness and ease, even from commercial storms so 
terrible as that of 1857; while the loss to the public from the 
ultimate failure of one or two of them to redeem their outstanding 
circulation — a loss which forms the only sound excuse for legis- 
lative interference — was too trifling to merit notice. The banks 
of the Northwestern States, it is true, were not so prosperous, the 
evils there being a want of capital, a lack of experience, and an 
excess of the spirit of speculation, — evils which rather created 
the faults in bank management, instead of being created by it. 
But even in Illinois and Michigan, as there is every reason to be- 
lieve, the defects and errors would gradually have cured them- 
selves, and a system would have been established at no distant 
day, the working of which would have afforded no just ground 
of complaint. 

True, the systems were not uniforin ; even the banking cur- 
rency was not wholly uniform. The banks of New York differed 
in some important respects from those of Massachusetts ; the 
banks of Louisiana and Virginia were unlike either. But I am 
by no means sure that this want of uniformity was not rather a 
merit than a defect. Banks are the natural outgrowth of the 
wants of the mercantile commu^nity among whom they have 
their origin, and answer their purpose best when they conform 
most closely to the peculiarities of the commerce therein carried 
on. Like political constitutions, if eminently successful, they are 
not made, but grow, by a natural process of self-enlargement and 
improvement. External authority rudely brought to bear upon 
them only mars and twists this otherwise healthy development. 
The greatest improvement ever made in practical banking in this 
country — the Allied Bank or Suffolk redemption plan — was 
devised and put in successful operation about fifty years ago, 
without any aid from the legislature, by half a dozen Boston 
merchants. It soon lived down all opposition, quietly extended 
itself by general assent over all New England, was copied and 
carried into New York about twenty years ago, and a bungling 



THE NATIONAL BANKING SYSTEM. 371 

attempt was made to engraft its main features upon this new 
National Banking law. The Clearing-house plan was another of 
these spontaneous additions and improvements from within, made 
some fifteen years ago, without asking leave or help from State 
legislature or Congress. The State bank systems, dissimilar as 
they were from each other, in the main worked well, because each 
did its own peculiar work as the wants of its locality required ; 
because they tended to keep the rates of discount low and 
equable ; because they transacted the exchanges between distant 
parts of the country with facility and at moderate cost ; and 
because the discredit and utter bankruptcy of any one member 
of the system was a comparatively rare phenomenon, and, for the 
very reason that the unlucky establishment had only a local 
character and influence, caused no widely spread disaster. 

As to their want of uniformity, let it be remembered that in Great 
Britain, where the subject of banking has been longer studied, and, 
on the whole, more successfully worked out in practice, than in 
any other country in the world, no attempt has been made to pare 
off all local peculiarities and reduce all the banks to the dead level 
of one plan. The Scotch banks have strongly marked features of 
their own, which work admirably well in Scotland, where alone 
one-pound notes are allowed to circulate. The English provincial 
banks differ from them in many respects, do not issue notes below 
five pounds sterling, and cannot extend their operations into the 
metropolitan region, consisting of London and a district 65 miles 
in radius around it, where the Bank of England reigns alone in its 
privilege of issuing bank currency, except a trifling amount by a 
few private banks, though the great Joint-Stock banks maintain an 
active and successful rivalry with it in the two functions of Deposit 
and Discount. The Irish banks, also, have their distinctive feat- 
ures and privileges, and no attempt has been made to assimilate 
them to those in other portions of the empire. 

Now the great advantage of these local peculiarities is, that the 
local currencies stay at home ; bank-bills circulate only in the 
neighborhoods where those who receive them are well acquainted 
with the character and management of the issuing institution, and 
can at any time obtain specie for them by presentation at its 
counter. The same beneficial consequence resulted from that hete- 
rogeneous character of our State bank currency which Secretary 



872 THE NATIONAL BANKING SYSTEM. 

Chase complained of. We all know that, under this system, as a 
general rule, people received and paid those bills only which be- 
longed to the immediate vicinity, and that each bank paid out only 
its own bills. Hence, if specie was needed for exportation, manu- 
facture, foreign travel, or other use, it was hardly necessary to do 
more than to cross the street in order to obtain it in exchange 
for bills. The Suffolk Bank system was the efficient guardian of 
this excellent feature of local circulation. Each bank was kept on 
its good behavior by the constant reflux of its own bills, though 
its domicile was some petty village on the border line of Canada. 

But a mere theorist is known by nothing so quickly as by his 
rage for uniformity. The variety of which Nature is never weary, 
the cast of countenance and character which she never allows to 
repeat itself, the adaptations to local peculiarities which one who 
is unfettered by system almost unconsciously makes, are an offence 
in his nostrils. He would reduce everything to the same dead 
level, face answering to face as in a mirror. Over the whole of 
our vast country, though one great portion of it is exclusively 
agricultural, another chiefly commercial, and a third largely man- 
ufacturing ; though one part has an excess of capital, and another 
a great deficiency of it, — all the banks must be of the same pat- 
tern ; at least one half of their issues must be proportioned, not to 
the wants of trade, but to the representative population ; they 
must issue bills struck on the same paper and from the same en- 
graved plate, (thereby giving an immense advantage to the coun- 
terfeiters ;) and all these issues must be based on one sort of se- 
curity, — United States stocks and bonds lodged in the National 
Treasury. In case of the failure or discredit of any portion of 
such currency, the bill-holders mast look for indemnity, not to the 
banks which issued it, but to the Treasury of the United States, 
which, at such times and in such manner as may suit the con- 
venience of its Secretary, must redeem the discredited bills out of 
the value of the stock deposited. 

Of course, the bills are really all made, issued, and redeemed, 
though in a roundabout manner, by the Treasurer of the United 
States ; but for some inexplicable reason, all the profits of such 
issue are given away to the banks. Then the people, who are the 
bill-holders, and at whose risk and cost this whole machinery is 
run, thousrh three fourths of them have no occasion ever to deal 



THE NATIONAL BANKING SYSTEM. 373 

directly with any bank, are not interested at all in pushing back 
the cii'culation upon any one of the issuing institutions, but accept 
and pass the bills precisely as if they were " greenbacks," never 
heeding the rather indistinct announcement on the face of the 
note, which refers the responsibility and profits of its issue to some 
obscure village, perhaps a thousand miles distant. 

True, the machinery is provided for the redemption of any bank- 
bill, not only at its own counter, but at some one of seventeen prin- 
cipal cities in the country, and ultimately at the city of New York. 
But then it is nobody's interest to put this machinery in motion. 
Formerly, under the State bank system, the bills naturally circu- 
lated only near their birthplace ; for the ultimate place of redemp- 
tion, and the only real responsible party, were found at the bank's 
own counter. Then this bank had an interest in preserving its 
monopoly of its own district, by sending all other bills out of it, 
■which it did easily through the Suffolk or Allied Bank plan. It 
received any bills, if not of too remote a locality, but paid out only 
its own. Under the National Banking law, the ultimate place of 
redemption is the Treasury at Washington, and the only really 
responsible party is the Treasurer of the United States. The bills, 
therefore, have no local habitation, only a local name, which might 
just as well be erased. New Hampshire bills circulate as well as 
any in Texas ; Texas bills do well enough in New Hampshire. 
Each bank may pay out its bills on the morning after it receives 
them from the Comptroller, with a comfortable assurance of not 
seeing more than a stray one or two of them again for a twelve- 
month. This is imiformity with a vengeance, pleasant for the 
stockholders of the bank, but not very agreeable for the public. 

Still it may be said that here is no real ground of complaint, for 
it is the very essence and excellence of the system that one bill 
shall be as good as another anywhere. Let us see. A depositor 
once had occasion to have a small check cashed at a bank which 
never, under the old system, paid him anything but its own bills. 
This time, it paid him four bills, one from some town unknown to 
him in Pennsylvania, a second from some place equally unknown 
in Michigan, a third from New York, and the fourth was an old 
State bank-bill. Now the National Bank-bills, though legal ten- 
der to and from the United States, except for the payment of 
duties or interest on national stocks, are not legal tender between 



374 THE NATIONAL BANKING SYSTEM. 

man and man. Suppose the person had occasion for some green- 
backs, which, at present and for some indefinite time to come, are 
" lawful money," in order to make a tender for the discharge of 
a debt. His own local bank is not bound to obtain them for 
him, for he has none of its own bills to present for them. He 
must write to some friend, if he can find one, either in Pittsburg 
or Philadelphia, to another at Chicago, to a third at Albany or 
New York, and ask them to present these bills for redemption at 
the proper places; and then, after considerable delay, and some 
pxpense in writing letters and for postage, and some risk in trans- 
mitting money by mail, he will receive lawful money in exchange 
for his little share of Mr. Chase's uniform National Currency. 

But the most extraordinary fact respecting this banking law re- 
mains to be mentioned. As we have seen, the principal reasons 
alleged for its enactment were the advantages of " uniformity in 
currency, uniformity in security," and exclusive control by the 
national government. Now the notorious fact was, that when this 
law was first enacted, the United States, for the first time in their 
history since the Revolutionary war, already possessed a supera- 
bundant uniform National Currency, — namely, the "greenbacks," 
— issued by the Treasury, exclusively under the control of the 
Treasury, legal tender between man and man, (which the National 
Bank-notes are not,) and free from the gi-eat fault just pointed out, 
of having a local name, and yet no proper local habitation. In 
fact, the only fault ever found with this " greenback " currency 
was, that we already had too much of it, that it had been issued 
in excess, and had consequently depreciated, the market price of 
gold, when the new bank law was passed, being $ 1.70. The law 
authorized the emission of 450 millions of these " gi'eenbacks," 
and over 300 millions of them had already been issued. They 
possessed the immense advantage of being equivalent to a loan 
from the nation to the government without interest, thereby 
saving the necessity of raising additional loans to this amount, at 
an annual charge of 25 or 30 millions. They filled up, and more 
than filled up, the gap caused by the withdrawal of specie after the 
suspension ; and being legal tender, which the State bank-notes 
were not, they were generally preferred by the people, throughout 
the length and breadth of the land, to those notes, and were 
necessarily received and paid out by those banks themselves. 



THE NATIONAL BANKING SYSTEM. 375 

Apparently the Secretary thought these advantages were too 
great to be monopolized by the government, even in that hour 
of her sore trial and great necessity; that the premium on gold 
was not high enough ; that the prices of commodities generally 
were not sufficiently inflated ; and that the National Treasury 
could -still bear the additional burden of supplying the army 
and navy at prices 40 or 50 per cent higher than ever. Absurd 
as this supposition must appear, I know not on what other line of 
argument his policy can be defended. After earnestly pressing 
the measure upon Congress in two successive annual reports, he 
succeeded at last, by sheer importunity, in inducing that body, 
almost without debate, to pass the law, February 25, 1863, 
creating an indefinite number of new banks without destroying 
the old ones ; giving away to these new creations the right to 
issue, for their own profit, 300 millions of so-called National Cur- 
rency, based on the credit of the United States, to be added to the 
450 millions already authorized of " greenbacks," and to the 
147 millions then existing of State bank circulation, making a 
formidable total of 897 millions of Paper Money to supply the 
wants of the loyal States alone, the circulation of the whole United 
States before the war, specie included, having been much less than 
half of that amount. Who can wonder that, about sixteen months 
after the passage of this law, or as soon as a comparatively small 
number of the new banks could get into operation, the mai'ket 
price of gold rose to 2.80 ? To adopt the form of an old criticism, 
I can conceive of a financier running so fast as to dash himself 
against a stone wall, which, unexpectedly to him, barred his pas- 
sage ; but it is hard to imagine one deliberately building such a 
wall, for the express purpose of knocking out his own brains 
against it. And yet we find the next Secretary of the Treasury, 
nearly two years after the first enactment of the bank law, and 
after he had added about 160 millions of legal-tender Treasury 
notes to the enormous aggregate just given, plaintively observing 
that, " notwithstanding the apparently large circulation of Paper 
Money issued under the authority of the various acts of Congress, 
its scarcity in the market has occasioned no slight embarrassment 
in the negotiation of loans." Surely, a very moderate knowledge 
of the laws of the cun-ency and finance might at least have 
prompted a suspicion, that not " the scarcity," but the superabun- 



376 THE NATIONAL BANKING SYSTEM. 

dance of Paper Money in the market produced this embarrass- 
ment ; that it did so by creating an enormous inflation of the 
prices of all commodities, thereby both nearly doubling the 
amount of loans which it was necessary to raise, and, by increas- 
ing speculation in every branch of commerce, raising the rates of 
interest, and making it more difficult to obtain any loans at all. 

One avowed purpose of the new system was to get rid of the 
old State banks. If the object had been to take away from these 
institutions, at least during the war, their power of issuing their 
own notes as currency for their own profit, I have already inti- 
mated an opinion that the measure would have been both just 
and highly expedient. Out of the three functions commonly 
exercised by our American banks I have shown that one, that 
of Circulation, is not necessary for their existence, and does not 
properly belong to them, but to the whole people, by whom, and 
at whose risk, this form of currency is used. Still further, 
these banks, by originating the suspension two months before 
CongTess followed their example, had forfeited every shadow of 
a claim to be permitted still to use their own notes as money ; 
they had thereby converted their Circulation into true " bills of 
credit," or Paper Money, which the Constitution expressly pro- 
hibits any "State," or State institution, from emitting; while 
this express prohibition, through what the lawyers call a negative 
pregnant, impliedly authorizes Congress to make such issues. It 
would have been perfectly right, therefore, to put a prohibitory 
tax upon their circulation, thereby driving it out of use alto- 
gether, and so creating another vacuum in the currency, to the 
extent of at least 150 millions, which Congress might have filled 
by an additional issue to that amount of greenbacks, without 
depreciating the currency any further. The whole profit deriva- 
ble from this source belongs to the people in their collective 
capacity ; and in the great struggle for national existence which 
was then pending, it was strictly equitable for the people to 
exercise this right, so far as it could do so, without compelling 
individuals to break their engagements by debasing the currency. 
The Bank of England pays the government 64 per cent of the net 
profits on its circulation. 

But Congress, under the guidance of the Secretary, preferred to 
throw away this great advantage altogether, to institute the new 



THE NATIONAL BANKING SYSTEM. 377 

banks by the side of the old ones, to make the former a free gift 
of 300 millions of currency, and merely to hold out this induce- 
ment, and as many others as possible, to persuade the State 
banks to reorganize themselves upon the new footing. The bait 
was not readily swallowed, and, the process of transformation 
proceeding very slowly, the law was tinkered again and again, 
and some of its worst present features introduced into it, solely 
in order to overcome the instinctive reluctance of the old institu- 
tions to place themselves on the new and rickety foundation 
which was set before them. Thus, the original law required one 
half of the 300 millions of circulation, as I have already said, to 
be apportioned among the States and Territories in proportion to 
their representative population. But the process of converting 
State institutions into National ones not going on rapidly enough, 
nor in any proportion to the census, this restriction was struck out 
of the new version of the law, passed June 3, 1864; and then, 
reconstruction proceeding faster, it was re-enacted in the winter 
of 1865. 

The next change was more important and injurious. The first 
law forbade the circulation of any notes of a smaller denomination 
than five dollars, — a very salutary prohibition, because it is the 
small-note currency which is most in use by the body of the 
people in retail purchases, so that it stays out longest, and is most 
efl&cieut in inflating prices. But, of course, this restriction was 
unpopular with the State banks, whose issue of small notes had 
formed the most profitable portion of their business ; and there- 
fore it was repealed by the law as amended in June, 1864. But 
the Comptroller of the Currency — intentionally, I suppose — was 
very dilatory in making ready any amount of these small notes for 
emission until the inconvenience created by the scarcity of them 
became so great, that he was compelled to hurry the work, in order 
to drive out those still lingering from the old State bank issues. 

The limitation remains, however, that not over one -sixth 
part of the circulation shall consist of these small notes; and, 
after the resumption of specie payments, none shall be issued of a 
lower denomination than five dollars. But what is this last pro- 
vision worth 1 After we shall have recovered our specie standard, 
there will be, of course, no danger of the inflation of prices, which 
is the evil now complained of as increased by the small-note cur- 



378 THE NATIONAL BANKING SYSTEM. 

rency. The law sanctions the issue, then, as long as it can do 
harm, and considerately forbids it after it has become innocuous. 
Besides, it is plain that this enactment unites the interests, and 
will combine the efforts, of all the National Banks to oppose and 
delay as long as possible the resumption of specie payments, 
since that step will at once deprive them of the most profitable 
portion of their issues, and compel them to provide a much larger 
stock of specie than would otherwise be necessary, in order then 
to redeem these small notes. 

This leads me to consider generally the comparative willingness 
and ability of the old State banks, and the present National Banks, 
to return to the specie standard. Secretary Chase, in his report 
for 1863, was obliged to confess, that "notwithstanding the sus- 
pension of specie payments [one year before] by the banks of 
the Eastern and Middle States, they show a larger reserve of 
specie at the beginning of the present year than at any previous 
period." In fact, the returns made on or near January 1, 1863, 
show that these banks then held 64 millions of specie against less 
than 148 millions of circulation, or over 43 per cent. So far as 
they were concerned, then, they were at that time abundantly 
able and ready to resume specie payments. But the Treasury 
of the United States was not ready, and is not ready yet, though 
the war ended five years ago. And its inability to resume may 
be attributed in a great degree — not entirely — to the National 
Banking law. This law requires the National Banks in the 
seventeen great cities to keep on hand a reserve, "in law- 
ful money,'' equal only to twenty-five per cent of their circula- 
tion and deposits; those in other places need keep only fifteen 
per cent ; and three fifths even of this meagre fifteen per cent may 
be bank balances due from the seventeen cities. Of course, this 
would be quite insufficient to prepare for resumption, even if 
the whole of this reserve in lawful money consisted of specie, which 
it does not, nor anything like it. In October, 1866, all the Na- 
tional Banks in the country held, in the aggregate, but little over 
eight millions of specie. It was a significant fact, that, even in 
our great cities, many of the banks celebrated their conversion 
into National Banks by selling nearly all their specie ; and as for 
those newly instituted in smaller places, it may reasonably be 
believed that they never had any specie to sell. 



THE NATIONAL BANKING SYSTEM. 379 

Even now, the great impediment to a resumption, the great 
cause of the continued inordinate inflation of prices, is the circu- 
lation of 300 millions of National Bank currency. This sum is 
needlessly added to more than 356 millions of greenbacks and 39 
millions of fractional currency, thus making an aggregate of nearly 
700 millions of Paper Money, or more than three times the amount 
of convertible bank-bills ever in use before the war. Under 
the old State bank system, the banks in the cities of New York 
and Boston did not issue more than eight millions each of their 
own bills ; and those in the former city usually held specie enough 
to redeem their circulation twice over. Each bank then main- 
tained strict watch over the proceedings and the solvency of every 
other bank ; since the failure of any one of the number could not 
fail to bi-ing loss and discredit upon all the others. But the Na- 
tional Banks have not as yet been obliged to hold any specie reserve 
whatever; and the failure of any one of them is a matter of 
iudiiference to the others, inasmuch as the ultimate redemption 
of all the bills of the bankrupt institution is secured by the pro- 
vision that is next to be noticed. The circulation now allotted 
to the banks of the two cities just mentioned exceeds 60 millions. 

A capital feature, though not a novel one, of the National sys- 
tem is, that it requires the redemption of the whole amount of 
circulating notes to be secured by the deposit and pledge of 
United States stock, in the proportion of $100, at the market price 
of such stock, for every $90 of such circulation. In ordinary 
times, when the country is at peace and the money-market is 
quiet, this provision for security is simply unnecessary, and the 
machinery of the law probably will not be put in operation half 
a dozen times in a century. The convertibility of the note is 
abundantly secured by the necessity of keeping on hand a reserve 
of "lawful money," equal to 15 or 25 per cent of the circulation 
and deposits ; or, at any rate, this safeguard would be enough, if, 
as under the State bank system, every bank were made the watch- 
ful guardian, through the Clearing-house and the Suffolk redemp- 
tion system, of the solvency of every other bank in its portion of 
the country. It was proved to be thus sufficient for the State 
banks by the experience of the great commercial crisis of 1857, 
and the still greater politico-commercial convulsion, through which 
we have just passed, of the great Rebellion. For though the 



380 THE NATIONAL BANKING SYSTEM. 

banks suspended specie payments in both cases, they did so for 
the protection of the commercial community at large, and not 
from any necessity incumbent on themselves. In the former 
case, they quietly resumed payments after the lapse of a few 
weeks, hardly one of their number suffering final discredit and 
bankruptcy ; and even in the latter case, as I have just shown, 
they were abundantly prepared to resume in less than a year, if 
the condition of the United States Treasury would have allowed 
them to do so without injury to the national cause. 

But the misfortune of this mode of securing the convertibility 
of the note by a deposit of national stocks is its liability to break 
down just when its services are most needed. It is unexception- 
able as a fair-weather system, but it would be swept away like 
chaff by a tempest, and must seriously involve the national finan- 
ces by its fall. Suppose the recurrence of a great national calam- 
ity, such as the outbreak of another serious war. Our old State 
banks have demonstrated their ability to ride out such a storm 
in comparative safety. But how would it fare with the National 
Banks 1 Most of their capital being invested, not in private secu- 
rities, but in United States stock, must, in such a case, fall in 
market value from 20 to 40 per cent. The necessity of immedi- 
ately increasing their deposit in order to make up this deprecia- 
tion, together with the demand for gold, and the private failures 
which the war would occasion, would not only oblige all the banks 
to suspend specie payments for the time, but force many of them 
into actual bankruptcy. The National Treasury, with its credit 
already impaired, being obliged again to appear in the market as a 
heavy borrower, would thus have the additional heavy burden 
thrown upon it of providing for the redemption of the whole paper 
currency of the country. Its only means of doing so would be to 
sell at auction the whole of the stock deposited with it as security, 
and thereby so glut the market that these bonds could be turned 
into money, and its own war-loans raised, only at an immense 
sacrifice. 

We need not attempt to trace the results of such a calamity any 
further. In any case of serious political or commercial disturb- 
ance, or of both combined, I can anticipate nothing but evil to 
both parties from this virtual partnership between all the banks 
in the country and the National Treasury. All practical bankers 



THE NATIONAL BANKING SYSTEM. 381 

will probably agree in the opinion, that the capital of a bank is 
never so safely invested as in good negotiable paper of the private 
merchants within its own circle of customers, each note being of 
moderate amount, growing out of hoiia fide business transactions, 
and having but a short time, not more than two or three months, 
to run. These private securities, if selected with ordinary judg- 
ment, can all be quickly realized or turned into cash, with a risk 
of loss almost too insignificant to deserve mention ; and even after 
a great commercial crisis, though the payment of a portion of the 
sum may be suspended for a while, the vdtimate loss on it, if it 
has been distributed through a sufficiently wide circle, ought not 
to exceed five per cent. If enough of such paper cannot be had, 
it is a proof that the business is overdone ; there is more banking 
capital than the proper mercantile community have any occasion 
for, and a portion of it ought to be withdrawn and invested by 
private persons in securities of a different character. 

It was a great mistake to take away the whole bank edifice 
from its solid foundations on private commercial credit, and place 
it on the morass, the quaking bog, of national stock, which may 
be selling at par to-day, and at 70 or 80 next week. It is of the 
very nature of stock in an immense national debt, especially if 
such debt be of recent origin, to be subject to all the skyey influ- 
ences ; to be affected, not only by any serious movement in the 
commercial world, but by every turn of domestic politics ; by every 
dread of a party coming uppermost which may favor repudiation ; 
by every war or rumor of war, whether our own nation is to be im- 
mediately concerned in it or not ; by every cloud which may darken 
the commercial or political horizon even in another hemisphere. 
About 1000 millions of our national stock are already owned in 
Europe. Thus is formed a bond of union between the stock-mar- 
kets of the two countries about as intimate as that which connects 
the Siamese twins ; the pulse of one must respond to every throb 
in the circulation of the other. According as the Bank of England 
lowers its rate of discount to 2|, or raises it to 10, per cent, — and 
frequently but a few months have been required to pass from one 
extreme to the other, — United States stock will rise or fall in the 
London market 20 per cent, and the New York market will follow 
suit. If there should be a failure of the wheat or the potato crop, 
England will pay for our com, not, as formerly, with gold, but by a 



382 THE NATIONAL BANKING SYSTEM, 

shipment of stock. Perhaps this may be as well for the country 
generally ; but I can see no security for the banks when they rest 
on a basis thereby rendered so unstable. 

It only remains to consider whether the partnership will be 
any more beneficial to the other party to it, — the United States 
Treasury. We have seen that it will not aid the banks in keeping 
up the convertibility of their notes ; will it help the government 
in negotiating future loans'? Mr. Chase informed Congress that 
"the immediate advantage to the government will be found in the 
market created for bonds, and the support thereby given to the 
national credit." But he was obliged to add, (writing just before 
the passage of the law,) "little direct aid, however, is to be ex- 
pected from this plan during the present, nor very much perhaps 
during the next, year." It was wise thus to expect but little, for 
in fact, up to the close of the war, as less than 115 millions of 
National Bank-notes had been issued, only about 128 millions of 
bonds and stocks had been received for them on deposit ; and this 
sum, when compared with the enormous amount — some 2,500 mil- 
lions — of the national debt at that time, seems too small to exert 
any appreciable influence on government credit. 

If the banks, before receiving their currency from the Comp- 
troller, had been required to come forward and subscribe enough 
to a new loan to obtain the stock which they were to deposit in 
the Treasury, a real advantage, though trifling in amount, would 
have been secured; the loan on which it would be necessary to 
obtain subscriptions from the public generally would be so much 
the smaller. But they were not asked to do this ; they had merely 
to provide themselves with stock enough out of the great mass of 
it which was already floating in the market. Many of the old 
State banks, before reorganizing themselves under the law of Con- 
gress, had already large investments in national securities ; many 
of their stockholders, it may fairly be presumed, had still larger 
amounts thus invested. What possible gain to the government 
was there in merely changing the name in which this stock was 
held, — in crediting it, for instance, to the Merchants' National 
Bank, and not simply to the Merchants' Bank, and to A, B, C, and 
D, stockholders therein % But it is to be deposited in the Treas- 
ury and remain there, instead of being liable, as heretofore, to be 
thrown into market any day, and sold for the most that it will 



THE NATIONAL BANKUIG SYSTEM. 383 

bring, thereby depressing the price of other national securities. 
Possibly there may be some good thus done ; but I cannot think 
the price of stock will be much affected by knowing that there are 
only 2,650 millions of it offered for sale, instead of 3,000 millions. 

But, place what estimate we may upon the indirect benefits to be 
reaped by the government from the establishment of National 
Banks, let us consider, for a moment, how extravagant is the price 
which the country is to pay for them. I will first adopt the sup- 
position most favorable for the advocates of the system, and grant 
that the whole stock deposited proceeds from a fresh loan made to 
the Treasury for this very purpose. How high will be the rate of 
interest payable on that loan 1 Any partnership of persons not less 
than five in number are told, that, if they will lend $ 100,000 in 
greenbacks to the nation, they shall receive stock for that amount 
on which is payable 6 per cent interest in gold, equivalent, at 30 
per cent premium on that metal, to 7.8 per cent in currency. Then, 
on condition that they deposit this stock in the Treasury for safe- 
keeping, (the whole being still borne to their credit, and the interest 
on it continuing regularly payable to them,) the Comptroller of the 
Currency will immediately deliver to them $ 90,000 in National 
Bank-notes ; and on the same day, if they are willing, the Secre- 
tary of the Treasurer will borrow back from them this very sum of 
$90,000 in bank currency, and give them three-years Treasury 
notes therefor, on which 7.3 per cent interest is payable. How 
stands the account now 1 The five partners have advanced out of 
their own private resources to the government nothing whatever 
but $ 100,000 in greenbacks ; and on this sum they are to receive 
$ 7,800 yearly as interest on so much stock, and $ 6,570 yearly as 
interest on the bank-notes first received by them as a free gift 
from the Comptroller, and then borrowed back again by the Treas- 
ury ; making altogether $ 14,370 as annual interest on $ 100,000. 

Looking at the matter in its other aspect, in which there is no 
false appearance of a new loan to the country, the offer is actually 
made to any holders of national securities, who choose to come 
together as a banking association, that, on condition of leaving this 
sum on deposit, they shall receive as a free gift an amount of 
currency equal to 90 per cent of their stock, on which the govern- 
ment will pay them the full market rate of interest. No wondei 
ihat, with such inducements, there was a very rapid organization 



384 THE NATIONAL BANKING SYSTEM. 

of banks under the new system, though most of them have but 
little capital. There had been 1629 of these institutions estab- 
lished before December, 1868. Even the New York city banks, 
which, as they existed under the former State organization, offered 
at first the most vigorous opposition to the new system, were 
bought over by the inducements thus held out to them, and have 
now a national character, much to their own profit, but very little 
to the advantage of the country generally. 

The National Banks have also been in great part relieved, at 
the cost of the public, of what has usually been the heaviest 
portion of the expense attendant upon banking operations. The 
ordinary reserve, whether in specie or other funds, which is neces- 
sarily kept as a basis for the circulation, and to provide for sudden 
emergencies, is, of course, so much dead weight to be carried, for 
it yields no interest whQe locked up in the safes, and is therefore 
subtracted from the active capital. But that extraordinary in- 
vention of Treasury notes which shoixld both bear interest and be 
legal tender, thus being at once Money and Capital, relieved them 
entirely, during the four or five years that these notes were in use, 
of this heavy charge. The whole 300 millions of National Bank 
currency were put into active circulation, and the reserves re- 
quired by law — 25 per cent for the city Banks and 15 per cent 
for the country Banks — were kept in these notes, yielding to 
those who held them 6 per cent compound interest. Thus receiv- 
ing from the government over 14 per cent a year on nine tenths 
of their capital, a large profit on their reserves, and charging 
the public 7 per cent for loans, this high rate being maintained 
by the usiu-ious terms on which the National Debt was negotiated, 
we need not wonder that the Banks have paid heavy dividends to 
their stockholders ever since they were instituted. Before the 
war, bank dividends seldom exceeded 8, and often were not more 
than 6 per cent ; since 1863, they have frequently divided 12 per 
cent, many of them also distributing, as soon as they were con- 
verted into national institutions, a heavy bonus to their stock- 
holders, proceeding from the sale, at 40 per cent premium or more, 
of their former specie reserves. 

When the compound-interest notes were finally paid off in 1867, 
the Banks had influence enough with Congress to procure the 
passage of a law creating, for their special benefit, 50 millions 



THE NATIONAL BANKING SYSTEM. 385 

of temporary loan certificates, payable on demand, but bearing 3 
per cent interest, the statute providing that their reserve fund 
might consist of such certificates. This was somewhat better for 
the public than the old arrangement ; but it was still bad enough, 
since it is difficult to see why the community should be taxed to 
pay any interest on reserves held for the exclusive benefit of bank 
stockholders, the only effect of such payment being to keep in 
active circulation 50 millions of greenbacks which would otherwise 
necessarily be withdrawn from use, such withdrawal tending to 
diminish the glut of Paper Money, and thereby aiding the restora- 
tion of the specie standard. In view of the manifold evils of a de- 
preciated currency, this particular enactment must be said to compel 
the people to pay a high price for the whips that scourge them. 

The only good effect, under the present system, of compelling 
the Banks to hold any reserve at all is, first, that it neutralizes in 
some degree the bad effects of a portion of the Bank currency ; 
and, secondly, it adds something to the security of the depositors. 
But the government is under no obligation to guard the interests 
of the depositors, who must look out for themselves, because they 
are, for the most part, the same persons who obtain loans from the 
Banks, own stock in them, and for whose benefit, in fact, the 
Banks exist. Laissez faire. Stockholders in joint-stock corpora- 
tions for other purposes than dealing in money, or even persons 
dealing with such corporations, do not claim from the State any 
special legislation for their seciu-ity ; and it would be very unwise 
in the legislature to attempt to afford such protection. Those 
are best guarded who guard themselves, the government interfer- 
ing only to punish crimes, remove public nuisances, and protect 
the rights of individuals. But the addition of the Bank issues to 
an already inflated currency is not so great an evil as it would be 
if the law did not require about one fourth of such addition to 
be locked up in reserve. Not that the portion so locked up is 
thereby wholly prevented from doing mischief Indirectly it stiU 
fosters speculation and enhances prices, though not on so large 
a scale, or with so much effect, as if immediately employed in 
making purchases. As I have already pointed out, a reserved 
fund is an increase of purchasing power, and its influence will be 
felt in the markets before any portion of it comes into active use. 
Speculative purchases are usually made on credit, and men will 

25 



386 THE NATIONAL BANKING SYSTEM. 

incur greater risks in them if they have reserved funds which 
will obviate the necessity of too early sales. 

For its proper service as a guaranty of the convertibility of 
the Bank-bills, the reserve in a National Bank is of no use 
whatever. The bills need no such guaranty, as the government 
is the party actually responsible for them, and they must be 
redeemed, in the last resort, at the Treasury of the United States. 
Their convertibility is thus so far insured, that they pass current 
just as well after, as before, the failure of the Bank which nomi- 
nally issues them, and reaps all the profit on their circulation. 
This statement even falls short of the truth ; such bills actually 
command a considerable premium in the market after the Bank 
has avowedly gone into liquidation, and its affairs are to be 
wound up by a receiver. A printed circular is now before me, 
from a Bank in the city of New York, offering "4|^ per cent 
premium for the Circulating Notes" of seventeen Banks therein 
enumerated, which had failed before September, 1869. The 
Treasury is obliged to employ the other National Banks as its 
agents to collect the bills of the bankrupt institutions, the public 
generally having no interest or wish to present them for redemp- 
tion; and even the sound Banks need to be stimulated to this 
work, by the bribe of having their own share of " the national cur- 
rency" increased by the aggregate amount of those discredited 
bills which they are the means of withdrawing from circulation. 
The bribe is not a small one ; for merely afiixing its corporate 
name to a pile of bills not one-tenth part of which it will ever 
see again, and buying an equivalent amount of United States 
bonds, the Bank reaps a profit of over 14 per cent a year at the 
cost of the tax-payers, who are burdened with an inflated currency. 

In fact, until specie payments shall be resumed, the converti- 
bility of the Bank-bills means nothing, and the hollow pretext 
might as well be given up altogether. The law requires the notes, 
on presentation, to be redeemed "in lawful money," — that is, in 
greenbacks. But no one wishes to exchange one of these forms 
of Paper Money for the other; both are equally current, and 
equally available for all the ordinary uses to which money can be 
applied, except that of exportation. The effect would have been 
precisely the same, and there would even have been a considera- 
ble saving of expense and of complexity in the operation of the 



THE NATIONAL BANKING SYSTEM. 387 

system, if the government had put its free gift of 300 millions 
to the National Banks into the form of " greenbacks " instead of 
" National Currency," the change of name really signifying noth- 
ing. Yet it was stated on the floor of Congress, that, when the 
organization of the system was as yet incomplete, "the Treas- 
urer of the United States borrowed large amounts of their cir- 
culating notes from the National Banks before they were put in 
circulation, and few or none of them have even been seen by those 
banks since." And at this time, it should be remembered, the 
principal of all the national loans being in Paper Money and the 
interest in gold, the government was actually paying from 9 to 
15 per cent a year on all that it borrowed. It does not appear 
surprising, then, that Banks should be organized, as they some- 
times were, for the sole purpose of obtaining notes to circulate, 
without doing any business in banking ; their whole capital was 
invested in United States bonds, and with the National currency 
thus obtained, they made further purchases of the same nature. 
Such a bank was found located at one of the desks in a broker's 
office, and the only entry on its books was of $20,000 credited 
to the Treasurer of the United States. 

Though the machinery contrived to secure the redemption of 
the bills failed to accomplish anything for the desired end, indi- 
rectly it did much harm. The country Banks were empowered to 
deposit three fifths of their reserve with some Bank in one of 
the seventeen large cities in which their circidation was to be 
redeemed. The rivalry of the city Banks with each other in at- 
tempting to obtain a share of these deposits caused a high rate of 
interest to be offered for them ; and thus all the spare capital 
from the country was attracted to the commercial centres, though 
liable to be recalled thence without notice. As interest was paid 
on these Bank balances, the city Banks could not afford to leave 
them unemployed, but let them on collateral security and " on 
call," as the phrase is, or payable on demand, to stockbrokers 
and speculators. They could not safely be let on any other 
terms, as they were always liable to be reclaimed by the country 
Banks when they were most needed. A fluctuating fund of large 
amount was thus kept in the cities, resting on a most uncertain 
basis, as if for the sole purpose of fostering reckless speculations 
in stocks and betting on the price of gold. Frequently loans 



388 THE NATIONAL BANKING SYSTEM. 

could not be obtained from the Banks for legitimate business trans- 
actions except at usurious rates, while they were freely offered 
" on call " at much lower rates, avowedly for use in stock-jobbing, 
the collateral security for the loan being the very stock employed 
in the speculation. 

It would be discreditable to the intelligence of the people of 
this country to suppose that evils and wrongs so signal as those 
created by the National Banking system could either escape notice, 
or be passively endured under a belief that they were inevitable. 
But so vast a multitude are here interested in the Banks, either 
as stockholders or as dependent upon them in their business, that 
the most influential portion of the community were bribed to 
silence, or induced to regard the mischief with only a shrug of 
wonder and discontent. The system was inaugurated amid the 
confusion and perils of a terrible civil war, Avhen attention was 
concentrated upon the great issues at stake in the strife, and 
men were willing to make any sacrifices demanded of them as the 
price of victory. It was adopted by Congress almost without 
debate, mainly through the importunity of the Secretary of the 
Treasury, who represented it as an indispensable aid in the man- 
agement of the finances. Even after the contest in the field had 
ceased, the restoration of the shattered fabric of the Union still 
engrossed the attention of Congress and the public ; and time was 
thus gained for the National Banks to be organized throughout 
the country, to be intwined with all the interests of trade, and for 
the people to become familiar with the appearance and use of 
the National currency. The old State banks had passed away 
beyond the possibility of revival ; and as commerce could not live 
without banking facilities of one sort or another, the new institu- 
tions were held to have acquired a vested right to the ground 
which they already occupied, and were accepted as a neces- 
sary evil. Indeed, the only question soon was, whether the 
National Banking system should not be enlarged and strength- 
ened, as well as perpetuated. 

It could not be expected that the enormous profits of National 
Banking should continue to be monopolized by the lucky institu- 
tions which were first organized under the law of 1863. The 
|uestions were soon asked in Congress, and by politicians desirous 
of being elected to Congress, — Why should there be only 1,629 



THE NATIONAL BANKING SYSTEM. 389 

National Banks, and not rather 3,000, or even a larger number ? 
Why should the Treasury make a free gift to them of only 300 
millions of National Currency, and then hire it back again at 
9 or 10 per cent interest, when it might, with equal or greater 
justice, thus give away twice as much, and shower the bounty 
equally upon all parts of the country, " in proportion to their 
representative population'"? If the country can afford to have 
700 millions of Paper Money in circulation, why should four 
sevenths of this sum be in the form of a loan without interest 
from the people to the government, instead of being, like the 
remaining three sevenths, a bounty to persons owning stock in 
Banks, and willing to lend it back again to the Treasury at the 
market rates of interest on government stock 1 AVhy should not 
the 400 millions now called "legal-tender Treasmy notes," or 
greenbacks, and "Fractional Currency," change their names — it 
would be only a change of name — to "National Currency," and 
then be bestowed on the numerous applicants for it, any five of 
whom, on receiving their share, would gladly organize therewith 
a National Bank at some spare desk in a broker's shop 1 Why not 
have the free or unlicensed banking, which has been so much talked 
about, and which would certainly multiply to an indefinite extent 
all the benefits now derived from the National Banking system ? 

These questions are not asked merely in the spirit of caricature. 
They fairly represent measures which have been, not only proposed 
in good faith in Congress, but gravely advocated there ; and the 
advocates of them have at least this merit, that the very extrava- 
gance of their proposals has thrown a strong light on the folly, 
wastefulness, and injustice of the system which they sought to ex- 
tend and perpetuate, but which they have imwittingly caricatured. 
The chief argument urged by them in favor of increasing the num- 
ber of the banks and the quantity of the currency is, that the bene- 
fits of the system are at present very unequally distributed 1 The 
New England and the Middle States have much more, the Western 
and the Southern States much less, than their fair proportion of 
the institutions that have been organized and of the Prize Money 
which has been distributed under the law as it now stands, if the 
extent of the population is a proper measure of the banking facili- 
ties that are needed. But it is not such a measure, since banks 
are needed in proportion, not to the number of the people, but to 



390 THE NATIONAL BANKING SYSTEM. 

the amount of business done by them ; and therefore a manufac- 
turing aud commercial community needs far more banking capital 
than one devoted in the main to agriculture. Under the old sys- 
tem, when each State was free to create as many banks as it desired, 
Congress having nothing to do with the matter, New England, with 
a population of three millions, had over four times as much bank- 
ing capital as the Western States, where the population was nearly 
eight millions. 

The real meaning of the claim put forward ostensibly for an equal 
distribution of banking facilities is, that each State should have 
its fair share of that free gift from the United States Treasury of 
300 millions of dollars, which was made under the pretext of cre- 
ating a new system of banks. As this bounty was given to those 
who first asked for it, and who could most quickly bring together 
and deposit with the government the quantity of United States 
stock which was the condition of the gift, (though not in any sense 
a payment for value received, since the stock continued to be their 
own property,) some States obtained much more than their fair 
proportion, and the others have a perfect right to demand that this 
inequality shall be removed, so that all may share alike. As those 
who had obtained more than belonged to them could not be reason- 
ably expected to pay back the excess, the pi-oposal now is, that the 
public Treasury shall furnish another sum, large enough to give 
each claimant as much as the luckiest State has heretofore received. 
This, at least, is an intelligible proposition, and perfectly satisfactory 
to all parties except to the nation at large, that must be taxed for 
the additional sum which is required. 

It seems to be forgotten by the claimants for additional bounty 
from the Treasury, that the amount of currency which continues 
in use in any State does not at all depend on the quantity issued 
to its banks, any more than the amount of specie remaining in 
circulation depends upon the quantity coined by the mint. The 
paper currency issued, and the specie coined, inevitably go where 
they are most needed, that equalization of prices throughout any 
one country and throughout the world, which commerce is always 
striving to effect, being only another name for the distribution of 
the whole stock of Money among various communities, in quantities 
exactly proportioned to their relative wants. The necessary laws 
of trade, and not the action of the United States government, de- 



THE NATIONAL BANKING SYSTEM. 391 

termine the rapidity of the circulation and its ebb or flow in differ- 
ent markets. The greenbacks certainly were not parcelled out by 
the Treasury among the several States, but they distribute them- 
selves, and no one complains of the inequality of the distribution. 
The currency of the National Banks is subject to the same influ- 
ences ; no portion of it has any proper home, or any preponderant 
local attraction, except towards the great centres of trade. Its dis- 
tribution is quite as free and spontaneous as that of the greenbacks. 
It is easy to see, therefore, that no additional banking facilities 
will be created in any State by the allotment to it of a larger por- 
tion of the National Currency, any more than by the free gift of 
an equivalent value in greenbacks or specie. The bounty of the 
government simply enables the Banks to make larger dividends to 
their stockholders ; it does not increase either their disposition or 
their ability to foster commerce and manufactures in their respec- 
tive localities. If these institutions are indebted for their existence 
to grants from the Treasury, and not to the exigencies of business, 
they will be banks only in name. 

It is often argued in favor of the National Banks, that the taxes 
which they pay to the National government on their circulation, 
deposits, and that portion of their capital which is not vested in 
United States bonds, and to the individual States on the shares 
owned by their stockholders, are a fair equivalent for the cun-ency 
which they have received. The obvious answer to this argument 
is, that capital existing in other forms — in railroads, telegraphs, 
express and gas companies, insurance, steamboats, and the like — is 
taxed at least to an equal extent. The tax upon deposits and cap- 
ital not vested in government securities is paid also by private 
bankers, who have received no bounty from the Treasury. If the 
National Banks should cease to exist, the capital which they now 
possess would not be destroyed, but would be employed in other 
undertakings, wherein it would contribute as much as at present 
to the support of government. The tax of one per cent on the 
circulation is not so much as that imposed on several other kinds 
of property ; and it is not very reasonable to expect that wealth 
obtained as a free gift should also be exempted from taxation, 
while the whole public burden should be imposed on labor and on 
capital that has been produced by labor. 

It is true that a judicious application of the taxing power might 



392 THE NATIONAL BANKING SYSTEM. 

lessen some of the evils of the present system. So far only as they 
are institutions of Deposit and Discount, the banks ought not to 
be taxed more heavily than other institutions employing an equal 
amount of capital. Perhaps they should be somewhat favored in 
'the exercise of these two functions, on the ground that they benefit 
the community by taking capital out of the hands of those who 
either cannot or will not use it, and confide it to those who will 
unite it with industry, and thereby make it active in the great 
business of production. The opinion, held by many, that banking 
should be more heavily taxed than any other trade, proceeds from 
an indistinct perception of the fact, that the banks in their third 
function, as issuers of currency, and especially of the small-note 
circulation, obtain profits which do not properly belong to them, 
and subject the community thereby to very considerable hazard of 
loss for the sake of their own advantage. If paper currency is to 
be substituted for metallic currency, the profits of the substitution 
ought to accrue for the benefit of those who make it, — of those 
who are willing to give up coin, and accept paper with all its 
attendant risks. The act of substitution is the act of the com- 
munity at large ; to be the agents in this act is a usurped func- 
tion of the banks, in no wise connected with their other and proper 
offices. It belongs to the state, and ought to be exercised for the 
benefit of the tax-payers, — that is, of the persons who, by giving 
up coin and accepting paper, make a saving of the precious metals, 
and ought to profit by that saving. 

Especially is this reasoning applicable to the case of the small- 
note circulation. In respect to bills of a higher denomination 
than $10, it may fairly be urged, that they circulate generally 
among merchants, bankers,' and capitalists, who therefore ought to 
be allowed, through the banks, to control the issue of them, so far 
as it can be controlled consistently with maintaining their con- 
vertibility into specie on demand, and to reap the benefit of their 
circulation. But not so with regard to the small bills, which are 
the money of the bulk of the people. Here the whole risk rests 
with the persons who use the notes ; and if any profit is to be de- 
rived from such use, this also should belong to them. Otherwise, 
a serious hazard is imposed upon them for the benefit of others, 
who can show no good title to the gains which they usurp. 

It appears from the official returns, that about 205 millions, or 



NATIONAL DEBT. 393 

more than two thirds of the present amount of bank currency, are 
in bills of various denominations not exceeding $10. These form 
the circulation properly so called, passing from hand to hand in 
wages and retail transactions ; they are the money of the working 
classes, who have nothing to do with the banks, and ought not to 
be taxed for their benefit. The soiled and ragged state of this 
portion of the currency is a significant indication of the use to 
which it is put. The larger bills are usually found as clean as 
when they were first issued ; in fact, they are seldom seen out of 
the banks, except in the hands of large dealers and wealthy per- 
sons. The small bills ought to be entirely displaced by specie, or 
should be taxed at least 7 per cent, so that the whole profits of 
their emission might be enjoyed by those who consent to use 
them. An indirect consequence of taxing them thus heavily would 
probably be, that stockholders in the National Banks would no 
longer oppose a resumption of specie payments. 



CHAPTER XVII. 

NATIONAL debt: VARIOUS METHODS OP FUNDING. 

National Debts, though they are now wellnigh universal, are 
comparatively modem inventions. They were invented at about 
the same time in France, England, and Holland, towards the close 
of the seventeenth century. Before that period, indeed, costly 
wars had been waged, and governments had not only contracted 
heavy debts, but often failed to pay them. Sometimes they got 
rid of them by the dishonest expedient formerly called " raising the 
standard," though we designate it by the more appropriate phrase 
of " depreciating the currency." Kings and governments frequent- 
ly became insolvent ; but their obligations, like those of private 
persons, were always regarded as strictly personal, and as finally 
dissolved by the death of the bankrupt leaving no available assets. 
The contrivance of funding a National Debt on the perpetual an- 
nuity plan, so as to throw the burden of supporting and paying it 
upon posterity, — in other words, of making debts transmissible 
by inheritance, like a house or farm, — was never heard of on Eng- 



394 NATIONAL DEBT. 

lish ground before the Revolution of 1688. It was first hit upon 
during those costly and disastrous wars which were brought upon 
Em'ope by the ambition of Louis XIV. 

Mr. Macaulay, indeed, in his anxiety to defend the fair fame of 
his hero, says " there can be no greater error than to imagine the 
device of meeting the exigencies of the state by loans was imported 
into our island by William III. From a period of immemorial 
antiquity, it had been the practice of every English, government to 
contract debts. What the Revolution introduced was the practice 
of honestly paying them." This statement, like too many others 
by this brilliant partisan historian, is succinct and terse, but inex- 
act and disingenuous. William III. refused to recognize a shilling 
of the pecuniary obligations left behind them by the Stuarts, 
though he did not pay the debts contracted under his own admin- 
istration, but left 15 millions sterling of them, which are not paid 
yet, and probably never will be ; and he did begin the practice, 
never before known in England, of bequeathing a National Debt 
to posterity, when, in 1694, he chartered the Bank of England, 
and gave it a perpetual annuity of £ 80,000, in return for a loan 
of £1,200,000. 

Up to 1775, the English National Debt, far the most consid- 
erable one in Europe, was but 146 millions sterling, about two 
thirds of which had been contracted in the Seven Years' War that 
terminated in 1762. The war of the American Revolution added 
over 100 millions sterling to its amount ; and the long struggle 
with France, which ended in 1815, raised it to 840 millions. 
Since that year, it has been reduced to about 800 millions, or 
somewhat less than 4,000 millions of dollars, the annual interest 
on which, averaging nearly 3| per cent, is about 133 millions 
of dollars. The origin of a large debt of the English govern- 
ment to the South Sea Company, about 10 millions sterling, was 
in what we should call deferred or funded " certificates of in- 
debtedness." The Treasury, being unable in any other way to 
pay the sailors of the fleet, gave them tickets for the sums due 
them with interest; and the poor tars, in their need of ready 
money, were obliged to sell these tickets to brokers at a heavy 
discount. The South Sea Company, a great financial association, 
bought them up, and then had interest enough to induce the 
government to fund them in perpetual annuities. 



NATIONAL DEBT. 395 

Every country of any importance on the continent of Europe 
has now a large National Debt, contracted in the main, like that 
of England, to meet the extraordinary expenses of war. In pro- 
portion to their wealth and ability to pay the annual interest, at 
least four of these countries, Austria, France, Italy, and Holland, 
are more deeply in debt than England, Most of these debts, like 
the English, are redeemable at par at the option of the govern- 
ment ; but no definite time is fixed for such redemption. In one 
sense, thei-efoi-e, the debt is merely nominal, since no person has 
a right to demand of the government, at any time, the payment of 
any portion of the principal. The annual interest is all that the 
stockholder is entitled to ; and this right is inviolable. The 
state did not borrow his money under any obligation to repay it 
at a fixed day, but only sold him an annuity, which is a perpet- 
ual annuity, unless the government should see fit, at some future 
time, to exercise the privilege, which it has reserved to itself, 
of redeeming any portion of it by paying off at par the stock of 
which it is really the interest. The operation oi funding properly 
consists in putting a National Debt into this form of a perpetual 
annuity, redeemable, at the option of the debtor, at a certain amount 
which is fixed upon, and is called the par. 

This par is not necessarily the sum which the government re- 
ceived at the time of contracting the debt, but is generally much 
larger, the excess often being 50 or 60 per cent. For instance : 
the government sells an annuity of $500 a year; if it chooses 
to create a 5 per cent stock for this purpose, it designates 
$10,000 as the par, since this sum, at 5 per cent, will yield 
a revenue forever of $500 a year; if it prefers a 4 per cent 
stock, it designates $12,500 as the par, as this sum also, at 4 
per cent, will produce a perpetual annuity of $500, In either 
case, it sells the $10,000 of 5 per cent stock, or the 12,500 of 
4 per cents, or the perpetual annuity of $500, — it matters 
not what name we give it, since in fact they all amount to the 
same thing, — for whatever may be at the time its market value, 
— very likely for not more than $7,000 or $8,000. But if, at 
some future day, the government should see fit to pay off the 
debt, it will be obliged to pay either $10,000 or $12,500, ac- 
cording as it has called the stock 5 per cents or 4 per cents. 
Hence it is, that the government usually pays interest on a much 



396 NATIONAL DEBT. 

larger sum than it has actually received. Thus, the English 
Debt, of 800 millions sterling at 3 per cent, represents only about 
464 millions actually received by the Treasury, so that the gov- 
ernment is in truth paying over 5| per cent interest. 

The first meaning of the phrase " funding a debt " was different, 
and deserves explanation, as it shows how the perpetual annuity 
plan originated. Over a century ago, it was a common practice in 
France and other countries, when the government was in want of 
money for war purposes, to " farm the public revenues," as it was 
called ; that is, in return for a large sum of money received in ad- 
vance, to make over to the public creditor, for a given period of 
years, the right of collecting some tax or duty for his own benefit. 
For instance : suppose the salt-tax, or the duty on sugar, to yield 
five millions annually. The government might then, on condition 
of receiving $38,600,000 paid immediately, /arrn or let out to the 
persons advancing this sum the right to collect, for their own bene- 
fit, the salt-tax or sugar-duty for ten years ; since an annuity for 
ten years of five millions, at 5 per cent compound interest, is 
worth about 38|^ millions. Of course, the " Farmers General," as 
these persons were called, became very unpopular, as they had 
their own ofiicers and excisemen, who collected the taxes for them 
with great rigor; and the odium of the burdensome taxes was 
thrown upon these agents, many of whom were guillotined during 
the IVench Revolution of 1789. The transaction was really a sale 
or mortgage, for a limited period, of certain revenues of the state, 
rather than a loan. It was perfectly legitimate ; since the state 
has an undoubted right, as one mode of raising extraordinary sup- 
plies, to impose additional taxes, and then to anticipate their pro- 
ceeds by selling or mortgaging the right to receive them, for a 
given number of years, as a means of repaying both principal and 
interest of the sums advanced on their security. The revenues 
thus pledged, or actually made over, were called the funds on 
which payment of these short annuities was secured. This was 
the original meaning of the phrase "funding a debt," which we 
have retained, though the practice itself has become obsolete, as it 
is not the fashion nowadays to guaranty the payment of the public 
debt in any other way than by an implied and indefinite pledge of 
the public faith. 

This custom of farming the public revenues obviously led the 



NATIONAL DEBT. 397 

way to the practice of selling annuities for short fixed periods, say 
for 10 or 20 years. Then life-annuities were sold. Afterwards 
Tontines were established, which are life-annuities paid to a small 
company of persons in the manner of a lottery, with benefit of 
survivorship, the share of each holder after his death being dis- 
tributed among his associates, so that the last survivor receives the 
aggregate amount originally paid each year to the whole company, 
and only at his death is the total annuity extinguished. Then long 
annuities, for 99 years or more, were granted, — a step which soon 
led to the present plan of making the yearly payments perpetual. 

The history of the finances in France is ciu-ious, as showing how 
difficult it was to establish in that country the doctrine, now so 
commonly received, that an irredeemable National Debt could be 
handed down as an inviolable bequest to later generations. When 
Colbert, the great minister of Louis XIV., became director of the 
finances in 1661, he found the state oppressed, not only with aU 
the forms of indebtedness already mentioned, but with others yet 
worse, growing out of the pernicious practice of farming, and even 
selling outright for an indefinite period, distinct portions of the 
public revenue. He instituted a plan of reform which was not 
more daring in its conception than felicitous in its results. Not 
venturing indeed to wipe the slate, he still insisted that the prompt 
and sure payment of a moderate interest on what the state had 
actually received was preferable to uncertain and irregular instal- 
ments of the yearly sums nominally due on a fictitious capital, 
which had swollen to its present amount under the joint action of 
the cupidity of contractors and capitalists, the malversation of men 
in office, and the necessities of the state. It was evident, also, 
that a continuance of these feeble and irregular efforts could end 
in nothing but speedy and total bankruptcy, in which case the 
public creditor would lose all. 

Colbert insisted that the state was under no moral obligation to 
pay anything more than the legal or customary interest on the 
capital which it had actxially received. Any usurious excess, forced 
upon it by creditors availing themselves of the opportunity afforded 
by its great exigencies during a period of confusion and war, might 
fairly be treated like the corresponding hard bargains forced by 
Jews upon the heir to an estate during his minority. The state, 
he argued, was a minor, and its guardians had the privilege, which 



398 NATIONAL DEBT. 

all legal codes concede in parallel cases, of reviewing the obliga- 
tions contracted during a period of nonage, and reducing them to 
an equitable standard. 

Whatever may be thought of these arguments, the system 
founded upon them was carried into execution. The discredited 
certificates of indebtedness were funded at the heavy rates of dis- 
count at which their actual holders had purchased them. Annui- 
ties first sold at ruinous rates, on account of the insufficiency of 
the special revenues assigned for their payment, and on which, 
consequently, the annual payments had not exceeded 30 or 40 per 
cent of their nominal amount, were proportionally reduced, or paid 
off at rates not exceeding what had been their current market 
value. By means of such retrenchments, and also of heavy fines 
levied upon those who had combined fraudulent with usurious 
transactions in their dealings with the state, the annual payments 
on account of the public debt were reduced to one half, in some 
cases to one third, of the sums first stipulated. The consequence 
of these measures, and of the economical reforms in the ordinary 
expenditures which accompanied them, was that the energetic min- 
ister was loudly censured for a breach of the public faith ; but the 
credit of the state was actually enhanced, and public loans could 
be effected on terms nearly as favorable as were granted to private 
borrowers. This, however, was not Colbert's object; he wished 
to take away both the necessity and the power of the government 
to incur debt under any circumstances ; and he would have suc- 
ceeded, but for the outbreak of another war in 1672. 

The example being thus set of reform by means of what would 
now be called partial repudiation, it was followed on several other 
occasions, when France was compelled to admit her virtual bank- 
ruptcy. Thus, in 1713, the capital of large portions of the public 
debt was arbitrarily reduced one fourth, and the interest on the 
remainder cut down from 5 to 4 per cent, on no other plea 
than state necessity. In 1716, and again five years afterwards, 
this plea was renewed, and the forced reductions were still more 
considerable. After this last period, the finances of the country 
continued in a chronic state of confusion and disaster, from which 
even the genius of Turgot and Neckar failed to rescue them, and 
of which the Revolution of '89 was both the natural conse- 
quence and the remedy. 



NATIONAL DEBT. 39? 

In striking contrast with this history of the growth of puWic 
debt in England and France, we have the financial prosperity at 
this period, and even to a much later day, of the little kingdom 
of Prussia. Aided by a considerable treasiu-e which the avarice 
of his father and his own administrative talent had accumulated, 
the genius of Frederic the Great met all the exigencies, the min- 
gled triumphs and disastei-s, of the war of the Austrian Succes- 
sion and the Seven Years' War, without contracting a dollar of 
debt. " The burdens of the war had been terrible, almost insup- 
portable ; but no arrear was left to embarrass the finances in time 
of peace." 

The question has been asked, and with increasing eamestnesa 
of late years, — Why have any National Debt ? Why not pay as 
we go, in war as well as in peace 1 Certainly not from the lack 
of ability. We might have done so, had we seen fit, even in the 
unparalleled war of the Great Rebellion, the most sanguinary and 
the most expensive of all that are recorded in modern history. 
It has already been proved, that the total expense of the war actu- 
ally was defrayed out of the surplus earnings of the people of these 
Northern States during the four years of its continuance, leaving 
the country at its close at least as rich, probably somewhat richer, 
than it was at its commencement. It was not thought proper, 
however, that the surplus earnings of the whole people for four 
or five years should be thus contributed to war purposes. It was 
deemed best that most of them should continue in the present 
enjoyment of the fruits of their industry, on condition of reimburs- 
ing, with interest, out of their future earnings, — in the way of 
stock payable in three, five, ten, or twenty years, — those owners 
of capital, (our own feUow-citizens, be it remembered,) from whom 
the government borrowed enough to carry on and finish the con- 
flict. 

The matter admits of being put in another light. The actual 
debt incurred during the first fourteen months of the war — that is, 
up to the 30th of June, 1862 — was less than 515 millions ; a year 
afterwards, (June 30, 1863,) it was 1,098 millions. The two 
years after that time were more expensive, partly on account of 
the increase of the armaments, partly from the interest payable 
on the debt thus already inciirred, but far more from the rise of 
prices, (the bounties for recruits and the soldiers' pay included,^ 



400 NATIONAL DEBT. 

which was wholly caused by that depreciation of the currency, 
consequent on the excessive issue of it, which was one of our 
modes of incurring debt. Deducting these last two sources of 
expenditure, namely, the interest and the greater outlay caused by 
the state of the currency, and allowing further for the vastly 
greater economy with which affairs would have been conducted if 
all expenses had been met by taxes levied within the year, it is 
certain that the cost of the war throughout need not have exceeded 
what was its actual average cost during the first two years, 
namely, six hundred millions a year. A year must be allowed 
after the close of hostilities for the slow and costly process of 
disbanding the army and navy, and returning to a peace estab- 
lishment. Then there were five years during which the people 
would have been obliged to support the Union and the govern- 
ment by an annual payment of 600 millions, thus forming an 
aggregate of 3,000 millions, or at least 25 per cent less than what 
was the aggregate of the national, State, and municipal war debt 
in the summer of 1866. 

Now the sum actually received from taxation by the national 
government, in the first fiscal year after the war, exceeded 550 
millions, besides at least 100 millions more to the States, cities, 
and towns, on account of war debt and expenses, making a total 
of 650 millions of war taxes. The average annual payment of 
such taxes, for at least four years more, was 450 millions. The 
people contributed these immense sums annually, though not 
without inconvenience, certainly without much grumbling. Can 
there be any reasonable doubt, then, that while the conflict was 
still raging, and the spirit of the nation was high even to enthu- 
siasm, we Govld have made the contribution 600 millions a year, 
not only without trouble, but with cheerfulness, and still have 
found the country, at the close of the war, not only as rich as at its 
commencement, but without any National Debt 1 The people could 
have paid 600 millions annually for five years of war more easily, 
and with greater contentment, than they can now pay 130 mil- 
lions a year, as interest on the debt, for an indefinite time to come. 

Why was it not so ordered 1 There can be but one answer to 
this question. It was from considerations of political expediency. 
It was feared that the people would be disheartened by so heavy 
a burden being imposed upon them at the outset, before their 



NATIONAL DEBT. 401 

hearts were fully kindled by the progress of the strife ; that the 
hands of the peace party would be strengthened by the accession 
of a vast number of the irresolute and the penm-ious, had these 
last been compelled from the beginning to contribute their whole 
surplus earnings to the war. I am far from denying that there 
was much force in these considerations. It must never be forgot- 
ten, that a war so completely popular in character as that thi'ough 
which the United States have recently passed, is waged not only 
in the field, but in the council-chamber, in legislative halls, in 
popular assemblies, and, above all, at the ballot-box. In or at 
these last it is that the tide of victory may be permanently 
stayed, or that defeat becomes final. Still it is true, that the 
gi'eat financial mistake which the government committed was in 
not imposing very considerable taxes from the outset, — not large 
enough to defray the whole cost of the conflict, and yet sufl5cient 
to place the national credit on an unassailable basis. Such taxes, 
if steadily increased as the war went on, and the people became 
accustomed to them, might have brought the country to the 
close of hostilities with a debt not more than one third as large 
as what it now owes, and contracted also on much more favorable 
terms. But it is easy to be wise after the event. 

The doctrine that a comparatively small immediate sacrifice, 
through the payment of heavy taxes during a war, might prevent 
the accumulation of a mountain of debt at its close, has been 
demonstrated by the experience of the British government during 
that long war with France, which, on the borrowing and funding 
system, actually added 600 millions sterling to the National Debt. 
The struggle really lasted but twenty-one years ; but allowing one 
year of preparation for it, and two more years for the necessary de- 
lay in coming back to a peace system, the whole war period may 
be said to have been twenty-four years. Putting aside the pay- 
ment of interest on debt contracted during the war, it appears that 
the total expenditm-e of the country exceeded the revenue ob- 
tained from taxation only during the first twelve, and the last four, 
years of actual conflict. During the other eight years, the income 
would have exceeded the expenditure, but for the interest on the 
sums borrowed during these sixteen years. Deducting the total of 
the credit excess during the one period from the total of the debit 
excess during the other, the remainder is only about 151 millions 

26 



402 NATIONAL DEBT. 

sterling. In other words, the total expenditure of the country 
from 1793 to 1816, both inclusive, for internal government, colo- 
nies, the war, and debt contracted previously to 1793, was only 
151 millions greater than the revenue actually derived from taxes 
during these years. Deducting this sum from 600 millions, — the 
debt actually incurred, — we have 449 millions as the debt need- 
lessly incurred from the accumulations of interest, from a vicious 
funding system, and from not imposing the heavy war taxes soon 
enough. 

Still further, if England had been out of debt at the begin- 
ning, — that is, in 1793, — so that there would have been nothing 
payable for interest on old debt, and if the amount actually raised 
by taxation had been equally distributed through the whole twenty- 
four years, instead of raising only one third of it during the first 
twelve years, and two thirds of it during the last twelve years, 
then the government would not only have been free from debt at 
the close, but would have had a handsome surplus. To state the 
matter still more simply : exclude altogether the payment of in- 
terest on debt, and suppose the sum actually levied by taxation to 
have been, not increased, but only distributed equally throughout 
the war period ; then the country would have emerged from the 
conflict, not only free from debt, but with a large surplus in the 
Treasury. In this sense, the whole cost of the war was defrayed 
out of taxes collected during its continuance. Only they were not 
levied at the proper time, and the interest of old debt was allowed 
to accumulate ; the result of these two mistakes being that the 
present English government is saddled with an additional debt of 
600 millions sterling. If we ask why the British ministry did not 
distribute the burden of taxation equally throughout the whole pe- 
riod, so that the income of each year would have covered the ex- 
penditure, the answer again is — political expediency. They feared 
to do it, lest the increased clamor of the Opposition should have 
compelled a peace. 

The next question is. Ought measures to be instituted for pay- 
ing off' the debt, principal and interest, as soon as practicable, or 
should it be allowed to continue for an indefinite period 1 The 
English government have adopted the latter policy, having re- 
duced their debt but little for half a century. It is neither a 
want of means, nor what has been called " an ignorant impatience 



NATIONAL DEBT. 403 

of taxation," which has caused this delay. The annual sum re- 
ceived from taxes is no larger now than it was during the four 
years ending in 1816, though the population meanwhile has nearly 
doubled, and the national wealth is increased at least fourfold. 
That the people would bear, without material discontent, a consid- 
erable increase of their present burdens, was proved by recent ex- 
perience in the Crimean War. The Debt is allowed to continue, 
from the belief that it gives firmness and stability to the govern- 
ment ; nearly the whole property of the country, as more or less 
intimately connected with the debt, being deeply interested in its 
support. It is also a powerful dissuasive from any future war ; it 
may be said to have placed England under very heavy bonds to 
keep the peace. This consideration has gained ground of late 
years, being the foundation of the ultra peace-policy adopted by 
that large portion of the commercial and manufacturing middle 
classes, who followed the lead of Mr. Cobden and Mr. Bright. It 
must be confessed that there are two sides to their favorite argu- 
ment. A large National Debt may restrain the country from 
going to war, even when the national honor and security seem to 
advocate vigorous measui'es. 

Reasons will soon be adduced to prove that it is not only the 
duty, but the interest, of the people of this country to make pro- 
vision for paying off the entire Debt at the earliest possible period. 
But we must first consider the natiu-e and different methods, the 
advantages and disadvantages, of the Funding System. National 
Debts are contracted chiefly during a war, when the finances of 
the state are embarrassed and its credit is low, and when the state 
of trade generally is such that even merchants and manufacturers, 
of large means and sound reputation, cannot obtain the use of cap- 
ital except at high rates of interest. The necessities of the gov- 
ernment being great and urgent, it must bon-ow on the best terms 
that can be obtained, but which are, of course, far less favorable 
than they would be in a time of peace. A keen contest ensues 
between borrower and lenders, the object of the former being 
to pay these usuriously high war-rates of interest for as short 
a time as possible, and of the latter to counteract his efforts, either 
by obtaining a guaranty that the loan shall continue many years at 
an imdiminished rate, or by charging a high price for the privilege 
of redemption at an earlier day. 



404 NATIONAL DEBT. 

The policy of the British government has been to fund the 
Debt, either at once, or as soon as possible ; that is, as already ex- 
plained, to put the interest into the form of a perpetual annuity, 
but redeemable at the pleasure of government at a fixed price, 
called the par. In Queen Anne's time, early in the seventeenth 
century, the ministry funded the debt at 6 per cent interest ; and 
the consequence was, after peace had returned, capital had become 
abundant, and the government credit had improved, that they were 
able to reduce the rates to 5, to 4, and even to 3|-, per cent, the 
stockholders having the option either to accept these rates, or to 
be paid off in full, the Treasury being then able to borrow in open 
market, at the current rates, the wherewithal to pay them. But 
shrewd business men, who had lent money to the state, were not 
to be caught in this way a second time; their object was, of 
course, to obtain the high war-rates of interest as long as possible, 
— even after, and long after, the return of peace. War returned, 
the government was again in great want, and capitalists refused 
to advance funds, except on some condition which should give 
them this advantage. The Treasury, on the other hand, was re- 
luctant to adopt the obvious means of giving a guaranty that the 
rate of interest should not be hereafter reduced, or, what is the 
same thing, that the Debt should be irredeemable for many years ; 
this would be a frank confession of the hard terms on which they 
were compelled to borrow, and the permanent burden thus thrown 
upon the country would endanger their popularity. But, in a 
covert way, that was done which amounted to precisely the same 
thing. 

The loan was offered in stock bearing interest at a very low 
rate, say 3 or 3|- per cent. But this stock was taken only at a 
heavy discount, varying from 40 to 50 per cent; that is, for £100 
of such stock, the lender paid only £50 or £60 in cash. The 
lenders said, "Capital is now worth " (war-times, be it remembered) 
" 5 per cent interest ; then, for a 5 per cent stock, we will give 
£100 cash for every £100 of stock; but for £100 of 3 per cent 
stock, we wiU pay only £60 in money." On these terms, the 
government could obtain the 10 millions in cash, which they 
needed, only by creating upwards of 16 J millions of Debt. And 
this is the sum which the country would be obliged to pay, should 
it ever be able and desirous to pay off the Debt. In this way, 



NATIONAL DEBT. 405 

the lenders are secured against any future reduction of the rate ; 
nominally receiving but 3, they are actually paid 5, per cent ou 
all the capital which they have advanced ; and they cannot be 
paid off, except on the hard condition of paying them £ 100 for 
every £ GO which they had furnished. 

In this manner, nearly the whole English National Debt has 
been created. It has been funded at a nominal par, exceeding by 
40 or 50 per cent the real par. No wonder the country is not 
very desirous to pay off at this nominal par a Debt thus created. 
In 1781, 21 millions of stock were created for 12 millions cash 
received ; on this stock, the rate being nominally 3, the govern- 
ment has been actiially paying 5^, per cent down to this day. 
Ev'en this was better than the terms on which they were fre- 
quently compelled to borrow during the long French war. Thus, 
in 1797, the price paid was 215 of stock for 100 in cash ; in 1804, 
185, and in 1815, 191^ for- 100. The average, for the whole 
period of 24 years, was 173 for 100. Thus, for the 600 millions 
of debt which this war saddled upon the country, less than 350 
millions was received in money. 

Even this is not all. A Sinking Fund was kept up most of the 
time, though such a Fund is a delusion and a loss whenever the 
government is contracting new debt more rapidly than the Fund 
is paying off old debt. Borrowing more money than you pay is 
not a promising mode of reducing one's debt. Still the Fund 
existed, and its Commissioners were therefore frequently in the 
market, buying up government stock, but never buying it on terms 
80 favorable as the original lenders of the money obtained from 
the ministry ; for there was a good deal of favoritism shown in 
the original distribution of the stock. Thus, in 1816, from the 
surplus of the loans raised the previous year, the government 
applied 13 millions sterling to buy up, at the rate of 62 for the 
hundred, the very stock which they had sold a few months before 
at the rate of 50 for the hundred. They cannot buy the same 
stock now for less than 90 ; and if they purchased any consider- 
able amount, the price would rise to 100, or par. 

The nature of a Sinking Fund is, that the poi-tion of debt re- 
deemed or bought up in any year is not cancelled, but is usually 
put into the hands of Commissioners for reducing the Public 
Debt, who continue to receive from the Treasury the interest pay- 



406 NATIONAL DEBT. 

able on the bonds which they hold, and apply what they thus re- 
ceive, together with any other sums which the government may 
annually allot for the same object, to the purchase of more stock 
to be added to the Fund and used in the same manner. The 
Fund is therefore rapidly enlarged, because the whole sum vested 
in it yields compound interest ; and every arithmetician knows 
that the accumulation then proceeds in geometrical ratio, thus 
yielding results which to the uninitiated appear quite marvellous. 
But there is nothing mysterious in the rapid increase of the stock 
so held, because the country, meanwhile, is paying full interest on 
the original amount of the Debt, though much the larger portion 
of it may have been redeemed and put into the Sinking Fund. 

This exposure of the vicious methods of the English fimding 
system may teach us equanimity in regarding the serious blunders 
committed by the government of the United States, in raising the 
enormous loans required for the prosecution of the recent war. 
The Secretary of the Treasury certainly appears to have been 
serious in his attempts not to commit the same kind of error as 
that of the English financiers. Except at an early period in the 
history of the war, when he did issue a large amount of stock 
bearing 6 per cent interest in gold, which was made irredeemable 
for twenty years, he seems to have used every effort to seciu-e the 
future controllability of the Debt, by obtaining the loans for short 
periods only, always looking forward to the time, after the return 
of peace, when the whole might be funded, at moderate rates 
of interest, in bonds redeemable at the pleasure of the govern- 
ment. That time has already arrived ; much the larger part of 
the American debt exists in a state which admits of immediate 
redemption. We now have the opportunity, so to speak, of bor- 
rowing nearly the whole Debt over again, issuing new obligations 
in place of those cancelled, and at such reduced rates as the public 
credit, and the financial wisdom of the administration, may en- 
able us to obtain. 

But even the attempt to secure the privilege of reducing the 
rate of interest on the loans at an early day was not carried out 
without serious errors. The Secretary did not keep in mind the 
obvious truth, that a debt is controllable when it may he soon 
paid off at par, but that it becomes incontrollable in the worst 
sense when it must he so paid. The right method, of issuing 



NATIONAL DEBT. 407 

bonds which may be redeemed in five, but need not be redeemed 
for twenty years, or of issuing three-year Treasury notes, con- 
vertible ax, matm-ity into these Five-twenty bonds, was not hit 
upon till a heavy amount of debt had been contracted in short 
loans, which matured while the war was still in progress, and the 
difficulties of the Treasury were at their height. Under the first 
loan authorized, 140 millions were issued in Treasury notes at 
over seven per cent, positively to be repaid in three years. Ac- 
cordingly, in the summer of 1864, when both our military and 
financial difficulties were at their worst, when a million of men 
in arms wei'e to be provided for, and the Secretaiy was at his 
wits' ends in the attempt to obtain funds for the exigencies of the 
day and hour, means had to be procured by him for the repay- 
ment of this great loan, matured, though only three years old. 
In fact, they were not paid, but were allowed to lie over, the 
holders having the option of exchanging them for 6 per cent 
bonds payable in twenty years. 

As if to push this system of short loans to the extreme, this 
same Loan Bill of July, 1861, authorized a further issue of fifty 
millions, in notes payaMe on demand, and receivable for all dues 
to the government. Of course, such a loan was only a mode of 
anticipating the slender proceeds of the revenue for the coming 
year ; it allayed the hunger of the Treasury in July and August, 
only to raise that hunger to actual famine in November and 
December. After the suspension of specie payments, which took 
place the next winter, these demand notes were quickly absorbed 
in the payment of customs duties, thereby depriving the govern- 
ment of the receipt of so much gold coin. 

But the great blunder in the management of the finances 
during the war, and one which, in its evil effects, not only on the 
accumulation of National Debt, but on the credit, the morality, 
and the general welfare of the whole people, far surpassed the 
worst errors of English or French financiers, was the depreciation 
of the currency through the excessive issue of Paper Money. As 
the Debt at the beginning of July, 1862, when the depreciation 
first became considerable, was only about 500 millions, it appears 
that about 2,000 millions have been borrowed by the government 
in this depreciated currency. This immense sum, borrowed in 
paper dollars, never, during the next three years, worth more than 



408 NATIONAL DEBT. 

77 cents in coin ; for a long period, not more than Q2^ cents ; foi 
one equally long, about 50 cents ; and for months, not more than 
40 cents, — the government has covenanted to repay, in a short 
time, by an equal number of gold dollars, each worth 100 cents. 
The precise amount of the loss, being unnecessary accumulation 
of Debt, which the country has thus sustained, cannot be ascer- 
tained ; for we know not the exact dates on which the loans were 
received and the moneys disbursed. But since the Treasury was 
obviously obliged to borrow most when the depreciation was 
greatest, — except, indeed, the heavy loans obtained in the spring 
of 1865, — it will be a safe, though a very rough, estimate to take 
the mean of the four values of the paj)er dollar which have just 
been mentioned — that is, about 57 cents — as the average value 
of the currency in which four fifths of the National Debt was 
contracted. In other words, the Treasury received about 1,140 
millions, and must pay back 2,000 millions. This is a little 
worse than English financiering during the long French war; 
for the nation, in that case, received a little more than 58 on the 
100, whereas we got only 57. 

But this is not all. On the fictitious capital, or artificial 
enlargement of the Debt, the British treasury pays but a very 
low rate of interest, — only three per cent ; the lowness of this 
rate, in truth, having been the inducement for the creation of 
the fictitious capital. But on the larger portion of its Debt, the 
United States reap no such compensation. The Treasury sub- 
jected itself to the humiliation of borrowing in one currency, and 
paying interest on the loan in another. It borrowed paper dol- 
lars ; it bound itself to pay interest on them in coin, and at the 
full market rate of interest. In a very roundabout way, the 
Secretary contrived to commit the very blunder which he was 
most anxious to avoid, — that of precluding the possibility of 
reducing the rate of interest after the termination of the war. 
Most of the stock bears interest at 6 per cent, and this rate can- 
not be reduced, except by paying off the bonds at par, or by a 
breach of the public faith. But as 2,000 millions of stock were, 
in fact, sold for what was equivalent to only 1,140 millions in coin, 
the country is actually paying 10|- per cent interest on the whole 
sum. The English sold their stock at an avowed discount of 42 
per cent, and nominally pay 3, but really over 5, per cent in- 



NATIONAL DEBT. 409 

terest. The American Treasury discounted 43 per cent nnder the 
thin disguise of a depreciated cuiTency, and actually pay 10^, 
under the guise of 6, per cent interest. 

I propose now to ofiFer some considerations in favor of contract- 
ing and paying a National Debt only in the form of short a?imnties, 
not exceeding twenty-five years in duration, so that the whole may 
always be paid off within the lifetime of the generation that con- 
tracted it. This plan, I shall endeavor to show, offers the follow- 
ing advantages : — • 

1. It avoids altogether the very serious objections which may be 
made to the alleged right of any society or body politic to bequeath 
its own voluntarily incurred debts to the generations which are to 
come after it, or to impose any pecuniary obligation upon those 
who are not yet in existence, and are therefore incapable of assum- 
ing the burden by their own consent. 

2. It materially lessens the risk of future repudiation or bank- 
ruptcy, and thus strengthens the public credit, thereby continually 
increasing the facility of borrowing at lower rates of interest. 

3. It has all the advantages of a Sinking Fund, the Debt being 
thus subjected to a constant and uniform process of liquidation, 
while it entirely avoids the risk to which a Sinking Fund, properly 
so called, is always liable, of being diverted, under any considerable 
emergency, from its original purpose, and applied to the state's 
present wants. 

4. The saving in the rates of interest effected through aU these 
advantages will be so considerable, that the yearly payment on the 
short annuity probably will not exceed, and may even be consider- 
ably less than, the corresponding payment on a perpetual annuity, 
so that the debt will be entii-ely discharged in twenty-five years 
with no greater effort than would otherwise be necessary merely 
to pay the annual interest on it forever. 

5. It will materially simplify the fiscal transactions of the gov- 
ernment, principal and interest being fused together into one sum ; 
while the annual payments on each separate annuity, whether of 
large or small amount, being made divisible in the manner of 
coupons, each being separately negotiable at a longer or shorter 
time before it becomes due, the market will be constantly supplied 
with eveiy form of stock convenient for investment, according to 
the various wishes and necessities of different capitalists. 



410 NATIONAL DEBT. 

Terminable annuities for long periods, as for one hundred years^ 
are usually found not to be desirable forms of investment ; and 
the experience of the British government proves that there is 
no considerable demand for them. Otherwise, funding in such 
annuities would be a very eligible mode of liquidating public debt 
"by a process so gradual as hardly to be perceived ; though, from 
the length of the term employed, it would still be open to the 
serious objection of entailing upon future generations a burden 
which does not rightfully belong to them. An annuity of $1,000 
for one hundred years, supposing money to be earning 4 per cent, 
is worth $24,500, while a perpetual annuity of the same amount 
is worth but $ 25,000 ; in other words, to increase the annual pay- 
ment less than one twelfth of one per cent would be, in this 
mode of funding, to cancel the whole debt in one hundred years, 
instead of allowing it to continue forever But corporations and 
individuals looking out for permanent investments do not willingly 
purchase into a constantly diminishing fund, "Even the sub- 
scribers to a new loan, who generally mean to sell their subscrip- 
tion as soon as possible, invariably prefer a perpetual annuity," 
redeemable only at par, at the option of the debtor, "to an irre- 
deemable annuity for a long term of years, of about equal amount. 
The value of the former being always the same, or very nearly the 
same, it makes a more convenient transferable stock than the 
latter." 

It might seem that the same objection would apply, and even 
with increased force, to the plan of funding in annuities of only 
twenty-five years' duration. And so it would, if, by this means, the 
term of full repayment were not brought within the ordinary limit 
of the lender's own life, so that he might himself reasonably expect 
to see both the beginning and the end of the transaction ; and if, 
also, the recent invention of coupons did not permit the distinct 
annual payments on any one annuity to be severed from each 
other, and then separately bought and sold. In this way, almost 
every conceivable form of investment, not exceeding a quarter of a 
century in duration, might be offered in the stock-market, to suit 
the different fancies of purchasers. 

Any one, for instance, might purchase a single instalment of an 
annuity of large amount, say $50,000, to be paid after the lapse 
of twenty-Uve years ; and also a complete annuity of small amounl^ 



NATIONAL DEBT. 411 

yielding him a yearly income of $2,500 for the same period. The 
price of the former, considering money to be worth 5 per cent, 
would be about $14,756; that of the latter, reckoning in the 
same manner, about $35,244, The aggregate of these two sums 
is $50,000, showing, of course, that the result for the purchaser is 
precisely the same as if he had invested this last sum in perpetual 
annuities at the same rate of interest 

Accordingly, this method combines every possible advantage of 
both systems. The lender who wishes to invest on the old plan, of 
annual payment of the interest only, with final reimbursement 
of the principal in one sum, can do so, with the benefit superadded 
of the constant operation of a Sinking Fund, one twenty-fifth part 
of the whole Debt being necessarily liquidated every year ; he has 
also the option, if he prefers the other system, of waiving the an 
nual payments of interest, and of allowing his investment steadily 
to accumulate at compound interest, without the delay, inconve- 
nience, and hazard of making annually fresh investments ; or, third- 
ly, should exceptional circumstances render such a course desu'able, 
he may sink the whole sum in a terminable annuity for any period 
not exceeding twenty-five years. 

The annuities may be made either of large or small amount, 
from $50 a year lap to $1,000,000. On those of some magnitude 
— say, for $1,000 a year, or any larger sum — the twenty -five 
annual payments being separable from each other as coupons, one 
or more of these separate amounts, payable at any future year, 
might be offered to the purchaser, or he might buy a whole annuity 
together, at his option. Thus, any person wishing to invest money 
may buy a coupon of any amount, due ten, fifteen, or twenty-five 
years hence ; and as he will buy it for its present value, his invest- 
ment will accumulate at compound interest for the given pei'iod. 
Moreover, he can always sell it at its present value, namely, the 
sum first paid for it, and compound interest on that sum for the 
time which has elapsed between his purchase and his sale. Or he 
may buy a complete annuity of any amount, and for any number 
of years not exceeding twenty-five. Or he may purchase a deferred 
annuity, not to begin for five or ten years, and then to run for the 
remainder of the period. In either of these cases, his capital will 
be invested at compound interest on government security. 

Lastly, I will give one other example to show that the working 



412 NATIONAL DEBT. 

of this system will enable any capitalist, who is desirous of doing 
so, to make his investment on the old plan precisely as if that 
alone were in operation. Suppose he wished to invest $100,000 
in government stock for ten years only. In perpetual annuities at 
5 per cent, this sum would yield him an annual income of $5,000 ; 
and when the ten years have elapsed, if the marhet price of the 
stock has not meamvhile declined, he may receive back his capital 
unimpaired. But he can never guard himself against the number- 
less contingencies in public affairs, which may so depress the price of 
the stock, that, if forced to sell at the time first proposed, he might 
lose a considerable part of his investment. By the new method, 
he would purchase from government the right to receive $ 1 00,000 
without interest, ten years hence, at the present value of that sum, 
which is, compounding interest at 5 per cent, $61,391.33; and 
no contingency, (except that of the nation becoming bankrupt, to 
which he would be equally exposed in the former case,) could pre- 
vent him from receiving the whole of that sum at the time agreed 
upon. He would also buy an annuity of $5,000 for ten yeai's, for 
which he would pay $ 38,608.67. The sum of these two purchases 
is $100,000, being the same amount, and yielding precisel}'" the 
same results, as if invested on the old plan. 

But far the most valuable, and, as I believe, the most popular, 
feature of the plan, would be the opportunity which it would afford 
of making investments to any extent, and for any time less than 
twenty-five years, in the form of steady accumulation at compound 
interest. I know not whether the economical or the moral advan- 
tages of this mode of funding would be the greater. Nothing could 
more effectually stimulate the habit of frugality, the effective de- 
sire of accumulation, and the consequent rapid growth of capital, 
than to keep the market fully supplied with securities of undoubt- 
ed permanence and value, the holders of which, waiving the receipt 
of annual interest, would find the fruits of their industry and econ- 
omy steadily increasing in geometrical ratio, without trouble or 
watchfulness on their part, in fall proportion to the time, and for 
such time only, as that during which they originally proposed to 
keep them, yet capable of use as a pledge for obtaining loans, or 
of immediate negotiation and sale, should a change of circumstan- 
>ces or plans make such realization desirable. Individuals and cor- 
iporations having frequently considerable sums to invest for a few 



NATIONAL DEBT. 413 

years, with a view only to safety and constant accumiilation during 
this period, and desirous of allowing as little of their capital to 
remain unemployed as possible, but at the same time not to place 
it entirely out of reach even for a day, would find in the oppor- 
tunity of purchasing into such stock the perfect fulfilment of their 
wishes. Moreover, as the peculiar advantages of investments at 
compound interest can be reaped to the full extent only by those 
who retain them unchanged for a considerable length of time, such 
securities would, in proportion to their amount, be less frequently 
offered for sale or bought for short periods, and therefore would 
afford less stimulus and nutriment to the blind passion for specu- 
lation and reckless adventure, which has too closely assimilated 
our stock-markets to the gi'eat gambling-hells which are often ap- 
propriately placed close beside them. We have had recent ex- 
emplification of this truth in the fact, that Treasury notes at 
compound interest, though issued to the amount of nearly 220 
millions, and expressly made legal tenders, like ordinary money, 
soon disappeared almost entirely from circulation, and were held 
as the most permanent portion of their reserves by banks and 
large capitalists. 

In truth, the creation of this form of stock would answer nearly 
all the purposes, and afford even more than the ordinaiy advan- 
tages, of SaA'ings' Banks, Life Insurance offices, and other Trust 
companies, besides offering the most eligible investments for the 
reserve funds of these institutions. The rapid growth of these 
establishments, and the prodigious extent of the field already 
covered by their operations, indicate the commonness of the desire, 
among the industrious and the frugal in our community, to invest 
their savings for accumulation at compound interest. To satisfy 
this desire is the peculiar work which such institutions have to 
do ; but their ordinary expenses are considerable, their operations 
are impeded by rivalry with each other, investments once made 
in them for a fixed period cannot be withdrawn without loss, and 
the seciu-ity which they afford is not always unquestionable. In 
each of these respects, investment in them would be less desirable 
than in United States stock accumulating in the same manner, 
and with the certainty of an equal, or even higher, rate of interest. 
In transactions which may continue for a quarter or half of a cen- 
tury, no prudent company can bind itself to pay a higher rate 



414 NATIONAL DEBT. 

than four per cent ; the government would pay four and a half or 
five per cent. What is called an " Endowment policy," the cove- 
nant being to repay the advances at a fixed period, though the 
life may not have terminated, has become a favorite form of in- 
surance, the main purpose evidently being to invest savings at 
compound interest for some years, and only a secondary one to 
make provision for others in view of the uncertainty of life. An 
easier, more profitable, and perhaps a safer, mode of accomplishing 
this chief object, would be to purchase, at its present value, some 
future instalment of a government annuity. 

The only remaining inquiry is, whether the annual charge of 
the National Debt funded in this manner would so much exceed 
the ordinary interest payable on it in perpetuity, as materially to 
increase the difficulties, or offset the advantages, of the proposed 
system. This can easily be answered. The annual payment on 
one million of dollars, vested in a twenty-five year annuity at 5 
per cent, would be $ 70,952.45, or a little less than 7.1 per cent; 
as our interest-bearing Debt is now about 2,000 millions, the an- 
nual charge of it at this rate would be 142 millions. At 4|- per 
cent, the payment each year on one million would be but $67,439, 
or about 6. 74 per cent ; and the yearly charge of the whole debt 
would be less than 135 millions. As the annual charge of the 
National Debt in its present form is about 116 millions, it is 
evident that the excess of 26 millions a year at 5 per cent, or less 
than 19 millions at 4| per cent, would be the cost of getting rid 
of the debt entirely in twenty-five years, over its present annual 
charge if kept up forever. 

The practicability of funding the debt in such an annuity, at 
one or the other of these rates, can hardly be doubted ; and if it 
were stipulated that the annual payment should always, as at 
present, be payable in gold, and that the whole revenue from 
customs duties should be permanently appropriated for this pur- 
pose, leaving the ordinary expenses of government to be defrayed 
out of the excises or internal revenue, the funding might be pos- 
sible at the lower rate ; and after the expiration of a few years, the 
amount of the debt being then proportionally diminished, it might 
be done even at 4 per cent. The Ten-forties, a 5 per cent stock, 
now amounting to over 194 millions, could be immediately con- 
verted into the new form, to the great advantage of its owners ; as 



NATIONAL DEBT. 415 

its repayment wovild thus be secured in twenty-five years, or about 
ten years less than its present period of necessary liquidation. 

But the expediency of the proposed system, as it seems to me, 
does not depend on the mere question of immediate pecuniary 
loss or gain, but on far gi-aver considerations regarding the preser- 
vation of the public faith, and the evils resulting from the per- 
petuity of a great National Debt. On the whole, there are the 
same motives for a government, as for an individual, to endeavor 
to get rid of debt. In itself considered, debt is both a discredit 
and an encumbrance. It detracts from the weight and influence of 
the nation in its relations with foreign powers, and nourishes dis- 
content at home, through the long-continued pressure of taxation. 
The trouble and cost of its management embarrass the administra- 
tion, and tend even to corrupt and degrade it, through the large 
increase of its financial concerns. If heavily in debt, a country is 
able to meet the exigencies of war only with its right arm in a 
sling. One reason why the American people passed comparatively 
unharmed through the fiery trial to which they were recently sub- 
jected was, that they were not burdened with an oppressive Debt 
at the outset. With the great load which they are now caiTying, 
the recurrence of a calamity similar in kind, though not equal in 
extent, would lead inevitably to a breach of national faith and a 
long train of financial disasters. 

The payment of the interest alone, at 6 per cent, in little over 
sixteen years, requires the receipt and disbm'sement of as large a 
sum as the principal. Especially in a republican government, 
where the virtues of simplicity, purity, and frugality are of high 
account, being indissokibly linked with the preservation of the 
state, it is of the iitmost importance to restrict the sphere of the 
national finances, and to avert even the suspicion of con'uption 
and fraud. The period of the South Sea Bubble in England and 
of Law's Mississippi scheme in France, about 1715, was one not 
merely of pecuniary ruin, but of degi'adation and shame, both in 
the councils of the state and in private life ; of almost universal 
forfeiture of reputation and self-respect, and a permanent deteri- 
oration of the national character. The origin and the character- 
istic feature of both these calamitous series of events was gambling 
in the public stocks, incited by the then recent institution of a 
permanent National Debt. The gigantic scale on which our na- 



416 NATIONAL DEBT. 

tional finances have been conducted for the last nine years appears 
to have exerted an equally disastrous influence on the tone of 
domestic politics, the morals of commerce, and the reputations 
of those who have gathered enormous wealth out of the perils and 
losses of the state. It would be sad to believe, that the burden 
which brings with it such consequences is fastened upon us for- 
ever. 

The reason commonly alleged to justify a nation in contracting 
a great Debt, and postponing indefinitely the time of its payment, 
is, that future generations, as they reap the benefits and share 
the security which have been obtained by the conflict, may also 
bear their share of its burdens and cost. We have triumphed, not 
only for ourselves, but for posterity; then let posterity help to 
pay the bill. But this argument, frequently repeated as it is, 
is a misconception and a blunder. What possible difference does 
it make to my heirs, whether I leave them an estate worth 
$50,000 burdened with a debt of $10,000, or an unencumbered 
property worth $40,000 1 In either case, whether the Debt is paid 
off or not, posterity must bear their full share of it, either by 
receiving their whole inheritance thus encumbered, or by receiving 
a free estate which has been cut down in size in order to pay off 
the encumbrance. In fact, the property has been actually ex- 
pended and destroyed in carrying on the war; the powder has 
been fired off, the shells bursted, the fortifications destroyed, the 
ships and houses burned, the men killed. As the population of 
the country can never be so large as it would have been, had not 
these lives been sacrificed ; so its wealth can never be so great as 
it would have been, had not this amount of property been de- 
stroyed. 

English Political Economists, almost with one voice, for more 
than a century, have strongly censured the practice of their own 
government in adopting the Funding System by putting the debt 
into the form of perpetual annuities. They condemn the system 
as alike indefensible in theory and ruinous in its consequences. 
In his Political Essays, published in 1752, Hume alludes with 
praise to the common practice of antiquity in making provision, 
during peace, for the necessities of war, "without trusting to 
extraordinary impositions, much less to borrowing in times of 
disorder and confusion." "On the contrary," he says, "our modern 



THE FUNDING SYSTEM. 417 

expedient, which has become very general, is to mortgage the pub- 
lic revenues, and to trust that posterity will pay oft' the encum- 
brances contracted by their ancestors ; and they, having before 
their eyes so good an example of their wise fathers, have the same 
prudent reliance on their posterity ; who, at last, from necessity 
more than choice, are obliged to place the same confidence in a 
new posterity. But not to waste time in declaiming against a 
practice which appears ruinous beyond all controversy, it seema 
pretty apparent that the ancient maxims are, in this respect, more 
prudent than the modern, even though the latter had been con- 
fined within some reasonable bounds, and had ever, in any in- 
stance, been attended with such frugality, in time of peace, as to 
discharge the debts incurred by an expensive war. 

" It is very tempting to a minister to employ such an expedient 
as enables him to make a great figure dm-ing his administration, 
without overburdening the people with taxes, or exciting any im- 
mediate clamors against himself The practice, therefore, of con- 
tracting debt will almost infallibly be abused in every government. 
It would scarcely be more imprudent to give a prodigal son a 
credit in every banker's shop in London, than to empower a 
statesman to draw bills, in this manner, upon posterity." 

Among the evils of the system, which he proceeds to enumer- 
ate, are the following : " The taxes which are levied to pay the 
interest of these debts are apt either to heighten the price of labor, 
or to be an oppression on the poorer sort. As foreigners possess a 
gi-eat share of our national funds, they render the public in a 
manner tributary to them, and may in time occasion the transport 
of oiu- people and our industry. The greater part of the public 
stock being always in the hands of idle people, our funds, in that 
view, give great encouragement to a useless and inactive life. 

" But though the injury that arises to commerce and industry 
from our public funds will appear, upon balancing the whole, not 
inconsiderable, it is trivial in comparison of the prejudice that 
results to a state considered as a body politic, which must support 
itself in the society of nations, and have various transactions with 
other states in wars and negotiations. The ill there is pure and 
luimixed, withoiit any favorable circumstance to atone for it ; and 
it is an ill, too, of a nature the highest and most important. I 
must confess," he adds, " when I see princes and states fighting 
27 



418 THE FUNDING SYSTEM. 

and quarrelling amidst their debts, funds, and public mortgages, 
it always brings to my mind a match of cudgel-playing fought in 
a China-shop. 

" There seems to be a natural progress of things which may 
guide our reasoning. As it would have required but a moderate 
share of prudence, when we first began this practice of mortga- 
ging, to have foretold, from the nature of men and of ministers, 
that things w^ould necessarily be carried to the length we see, so, 
now that they have at last happily reached it, it may not be 
difficult to guess at the consequences. It must, indeed, be one of 
these two events : either the nation must destroy public credit, or 
public credit must destroy the nation. It is impossible that they 
can both subsist after the manner they have been hitherto man- 
aged in this, as well as in some other countries." 

Adam Smith, the founder of the science of Political Economy, 
is not less explicit in his condemnation of the Funding System. 
" The progress of the enormous debts," he says, " which at present 
oppress, and will in the long run probably ruin, all the great 
nations of Em-ope, has been pretty uniform. Nations, like pri- 
vate men, have generally begun to borrow upon what may be 
called personal credit, without assigning or mortgaging any par- 
ticular fund for the payment of the debt ; and when this resource 
has failed them, they have gone on to borrow upon assignments 
or mortgages of particular funds." 

After specifying various acts of Parliament under which loans 
were obtained up to 1717, he goes on to observe : "in consequence 
of these different acts, the gTcater part of the taxes, which before 
had been anticipated only for a short term of years, were rendered 
perpetual as a fund for paying, not the capital, but the interest 
only, of the money which had been borrowed upon them by differ- 
ent successive anticipations. 

" Had money never been raised but by anticipation, the course 
of a few years would have liberated the public revenue without 
any other attention of the government besides that of not over- 
loading the fund, by charging it with more debt than it could pay 
within the limited term, and of not anticipating a second time 
before the expiration of the first anticipation. But the greater 
part of European governments have been incapable of those atten- 
tions. They have frequently overloaded the fund, even upon the 



THE FUNDING SYSTEM. 419 

first anticipation ; and when this happened not to be the case, 
they have generally taken care to overload it by anticipating a 
second and a third time, before the expiration of the first anticipa- 
tion. The fund becoming in this manner altogether insufficient 
for paying both principal and interest of the money borrowed upon 
it, it became necessary to charge it with the interest only, or a 
perpetual annuity equal to the interest ; and such improvident 
anticipations necessarily gave birth to the more ruinous practice 
of perpetual funding. But though this practice necessarily puts 
off the liberation of the public revenue from a fixed period to one 
so indefinite that it is not very likely ever to arrive, yet as a 
greater sum can in all cases be raised by this new practice than 
by the old one of anticipations, the former, when men have once 
become familiar with it, has, in the great exigencies of the state, 
been universally prefeiTed to the lattei'. To relieve the present 
exigency is always the object which principally interests those 
immediately concerned in the administration of public affairs. 
The future liberation of the public revenue they leave to the care 
of posterity. 

" The practice of funding has gradually enfeebled every state 
which has adopted it. The Italian republics seem to have begun 
it. Genoa and Venice, the only two remaining which can pretend 
to an independent existence, have both been enfeebled by it. 
Spain seems to have learned the practice from the Italian repub- 
lics ; and (its taxes being probably less judicious than theirs) it 
has, in proportion to its natui'al strength, been still more enfeebled, 
France, notwithstanding all its natural resources, languishes under 
an oppressive load of the same kind " ; [and the disorder of the 
finances which it occasioned, as we all know, was the immediate 
caiise of the terrible Revolution of 1789, the first outbreak of 
which Smith lived long enough to witness.] 

" When national debts," continues Smith, " have once been 
accumulated to a certain degree, there is scarce, I believe, a single 
instance of their having been faii'ly and completely paid. The 
liberation of tiie public revenue, if it has ever been brought about 
at all, has always been brought about by a bankruptcy ; some- 
times by an avowed one, but always by a real one, though fre- 
quently by a pretended payment." 

In view of these evils and dangers, the English Parliament have 



420 THE FUNDING SYSTEM. 

very recently, under the lead of Mr. Gladstone, made a feeble 
attempt to get rid of a small fraction of their National Debt, by 
converting it from perpetual into terminable annuities. 

The fallacy of supposing that the payment of the interest is only 
from the right hand to the left, the nation as a whole being none 
the poorer for it, and even that the property of the country is in- 
creased by the whole amount of the National Debt, is thus ably 
exposed by Justice Blackstone in his Commentaries. " By means 
of our National Debt," says he, " the quantity of the property in 
the kingdom is greatly increased in idea, compared with former 
times ; yet, if we coolly consider it, not at all increased in reality. 
We may boast of large fortunes and quantities of money in the 
funds. But where does this money exist 1 It exists only in name, 
in paper, in public faith, in parliamentary security ; and that is un- 
doubtedly sufl&cient for the creditors of the public to rely on. But 
then, what is the pledge which the public faith has pawned for the 
security of these debts 1 The land, the trade, and the personal in- 
dustry of the subject, from which the money must arise that sup- 
plies the several taxes. In these, therefore, and in these only, the 
property of the public creditors does really and intrinsically exist ; 
and, of course, the land, the trade, and the personal industry of in- 
dividuals are diminished in their true value just so much as they 
are pledged to answer. If A's income amount to £ 100 per annum, 
and he is so far indebted to B that he pays him £ 50 per annum for 
his interest, one half of A's property is transferred to B, the creditor. 
The creditor's property exists in the demand which he has upon 
the debtor, and nowhere else ; and the debtor is only a trustee to 
his creditor for one half of the value of his income. In short, the 
property of a creditor of the public consists in a certain portion of 
the national taxes ; by how much, therefore, he is the richer, by so 
much the nation, which pays these taxes, is the poorer." 

Coming down nearly to our own day, far the highest authority 
that can be cited is that of Ricardo. To a knowledge of the theory 
of Economical science, and a power of disentangling its general 
principles, and of abstract reasoning concerning them, which even 
Adam Smith never equalled, he added the practical knowledge of 
the subject which can be acquired only from long familiarity with 
the most intricate transactions of commerce and finance. He 
^massed his immense fortune solely by trading on the Stock Ex- 



THE FUNDING SYSTEM. 421 

change, with whose operations he had been famihar even from 
boyhood. From 1808 to 1823, when he died, his voice was more 
potential than that of any other man in determining the com- 
mercial and financial policy of England. The famous Bullion Re- 
port of 1810 was mainly his woi'k, though he did not write it ; the 
Resumption of Cash Payments by the Bank of England in 1819 
was guided entirely by his counsel. Among statesmen, this 
wealthy Jew stock-broker counted Canning, Huskisson, and Sir 
R. Peel as his pupils ; among Political Economists, McCulloch and 
John S. Mill have been his faithful disciples. Let us see what he 
thought of the Funding System, on which he published a separate 
essay. 

There are three modes, he says, in which a nation can raise an 
additional sum of twenty millions wherewith to defray the military 
and naval expenditures of the first year of a war. First, by ad- 
ditional war-taxes, enough to raise the whole sum within the year, 
from which taxes the covmtry would be totally fi'eed on the return 
of peace ; secondly, the money might be borrowed and funded, and 
then, with interest at five per cent, the country would be loaded 
forever with one million per annum taxes for the first year of war, 
an additional million for the second year's expense, and so on for 
every year the war might last, no relief an-iving during peace, or 
in any futixre war. Should the war continue twenty years, the 
country would be perpetually encumbered with taxes of twenty 
millions a year, and would have to repeat this course on the recur- 
rence of a new war. The third course would be, to borrow the re- 
quired twenty millions a year as before, but to raise by taxation, 
not merely one million, but 1,200,000 for each year, the surplus of 
200,000 to be invested as a Sinking Fimd, which would accumu- 
late rapidly enough to pay off the whole debt in forty -five years, 

" Of these three modes," he says, " we are decidedly of opinion 
that the preference should be given to the first. The bm-dens of 
the war are \indoubtedly gi-eat dm-ing its continuance, but at its 
termination they cease altogether. We ^re too apt to think that 
the war is burdensome only in proportion to what we are, at the 
moment, called to pay for it in taxes, without reflecting on the 
probable duration of such taxes. It would be difticult to persuade 
a man possessed of £20,000, or any other sum, that a perpetual 
payment of £50 was equally burdensome with a single tax of 



422 THE FUNDING SYSTEM. 

;£ 1,000. He would have some vague notion that the £50 per an- 
num would be paid by posterity, and would not be paid by him ; 
but if he leaves his fortune to his son, and leaves it charged with 
this perpetual tax, where is the difference whether he leaves him 
£20,000 with the tax, or £19,000 without it] This argument of 
charging posterity with the interest of our debt, or of relieving 
them from a portion of such interest, is often used by otherwise 
well-informed people ; but we confess we see no weight in it. 

" If an individual were called upon to pay £ 1,000 to the income- 
tax, he would probably endeavor to save the whole of it from his 
income ; he would do no more if, in lieu of this war-tax, a loan had 
been raised, for the interest of which he would have been called 
upon to pay only £50 income-tax. The war-taxes, then, are more 
economical ; for when they are paid, an effort is made to save 
to the amount of the whole expenditure of the war, leaving the 
national capital undiminished. In the other case, an effort is 
made to save only to the amount of the interest of such expendi- 
ture, and therefore the national capital is diminished in amount. 
The usual objection made to the payment of the larger tax is, that 
it could not be conveniently paid by manufacturers and land- 
holders, for they have not large sums of money at their command. 
We think that great efforts would be made to save the tax oiit of 
their income, in which case they could obtain the money from 
this source. But suppose they could not, what should hinder 
them from selling a part of their property for money, or from 
borrowing it at interest 1 That there are persons disposed to lend 
is evident from the facility with which government raises its loans. 
Withdraw this great borrower from the market, and private bor- 
rowers would be readily accommodated." [During the war of the 
Eebellion, private bon-owers obtained loans on far easier terms 
than the government could. The credit of the latter was so low, 
that for a long time it really paid, and is now paying, from 9 to 
14 per cent interest, while private merchants obtained all they 
needed at 7 per cent. Then the country would have saved from 
2 to 7 per cent, even if taxation had been made so heavy as to 
compel some contribu.tors to borrow money in order to pay their 
taxes.] " In the case of a loan, A advances the money and B pays 
the interest, and everything else remains as before. In the case 
of war-taxes, A would still advance the money and B pay the 



THE FUNDING SYSTEM. 423 

interest, only with this difFei'ence, he would pay it directly to A ; 
now he pays it to government, and government pays it to A. 

" In every view of this question, we come to the same conclusion, 
that it would be a great improvement in our system forever to get 
rid of the pi-actice of funding. Let us meet our difficulties as they 
arise, and keep our estates free from permanent encumbrances, of 
the weight of which we are never truly sensible till we are involved 
in them past remedy." 

" Under the firm conviction that nations will at last adopt the 
plan of defraying their expenses, ordinary and extraordinary, at 
the time they are incurred, we are favorable to every plan which 
shall soonest redeem us from debt ; but then we must be convinced 
that the plan is effective for the object. This, then, is the place 
to examine whether we have, or can have, any security for the 
due application of the Sinking Fund to the payment of the debt." 

After examining this question, he concludes: " It is, we think, 
sufficiently proved, that no securities can be given by ministers 
that the Sinking Fund shall be faithfully devoted to the payment 
of debt ; and without such securities we should be much better 
without such a Fund. To pay off the whole or a great portion of 
the debt is, in om' estimation, a most desirable object, if, at the 
same time, we acknowledged the evils of the Funding system, and 
resolutely determined to carry on our future contests without hav- 
ing recourse to it. This cannot, or rather will not, be done by a 
Sinking Fund as at present constituted, nor by any other that we 
can suggest ; but if, without raising any Fund, the debt were paid 
by a tax on property, once for all it would effect its object. Thus, 
by one great effort, we should get rid of one of the most terrible 
scourges which was ever invented to afflict a nation ; and our com- 
merce would be extended withoxit being subject to all the vexa- 
tious delays and interruptions which our present artificial system 
imposes upon it." 

Among the English Economists of our own day, McCulloch is the 
oldest and best-known authority ; and as his extreme conservatism 
tempts him to uphold every practice of the English government 
and people, his opinion of the Funding System ought to have great 
■weight. " Every people involved in war," he says, " however just 
and necessary the contest may b'e, must sooner or later experience 
the effect of the waste of capital, or of the means of future produo- 



424 THE FUNDING SYSTEM. 

tion, which it rarely fails to occasion. And it is clear that no 
scheme of finance can be bottomed on sound principles, which dis- 
guises these necessary consequences of war, and deceives the public 
with regard to their real situation. This, however, is notoriously 
the case with the Funding System. It is truly said to require no 
individual to make any extraordinary sacrifice at any particular 
period ; and, in this respect, it bears a close resemblance to those 
most dangerous diseases which steal slowly and imperceptibly on 
the constitution, and do not discover their malignant symptoms 
until they have fastened on the vitals and vitiated the whole 
animal economy. 

" The Funding System has been almost universally adopted, and 
it has uniformly been abused, and, how serviceable soever at first, 
has become, in the course of time, generally injurious. It was 
carried to a great extent in Holland ; and we have already seen 
that it is to it, or rather to the excessive taxation in time of peace 
which it occasioned, that the low rate of profit in that republic, 
and the decline of her fisheries, manufactures, and commerce, are 
to be ascribed. ' Noios avons remarque, que Vaccroissement successif 
des impots, et la necessite de /aire des emprunts, ont concouru, plus 
que toute autre cause, a faire decroitre le commerce de la Hollande. 
Cest la une suite inevitable surtout des emprunts, parce quhme 
paix ne mortifie pas les dettes de Vetat. Tous les avantages d'une 
guerre heureuse ne honifient les desavantages que Fit at en souffre, 
Les peuples sont moins heureux, et Vetat s'est affoibli.^ " 

An avoidance of the Funding System is not only the true re- 
publican doctrine ; we have a right to call it also the established 
American policy. The United States, hitherto, have always paid 
off their war debt within the lifetime of the generation that con- 
tracted it. The Revolutionary Debt was, in fact, fully discharged 
at least as early as 1817; for the National Debt still existing in 
that year ought to be considered as resulting from the purchase of 
Louisiana in 1803, and from the war of 1812. This last Debt was 
still more rapidly extinguished, for no portion of it remained un- 
paid in 1835, The country was then entirely free from debt, and 
even found itself encumbered with a surplus income. Thus far, 
also, we have been paying off the enormous debt contracted during 
the Great Rebellion at a rate which, if continued, would insure its 
extinction in about one generation. In July, 1865, it exceeded 



THE FUNDING SYSTEM. 425 

2,783 millions ; in February, 1870, it was less than 2,445 millions, 
thus showing an average annual diminution of about 74 millions. 
At this rate, even if taxation wei'e cut down as rapidly as the an- 
nual charge for interest is diminished, the Debt would be extin* 
guished in thii-ty-three years from 1870. 

The value absorbed in loans raised at home is so much with- 
drawn from the capital employed in aiding productive industry 
within the country. This is an argument, which is strongly 
m'ged by Dr. Chalmers and Mr. J. S. Mill, in favor of raising 
within the year the whole of the supplies needed for war pur- 
poses, instead of obtaining them by an increase of the National 
Debt. Whatever is spent unproductively, they say, cannot but 
be drawn from capital or yearly income. " The whole and every 
part of the wealth existing in the country forms, or helps to form, 
the yearly income of somebody. The privation which it is sup- 
posed must result from taking the amount in the shape of taxes 
is not avoided by taking it in a loan. The suffering is not 
averted, but only thrown upon the laboring classes, — the least 
able, and who least ought, to bear it ; while all the inconveniences, 
physical, moral, and political, produced by maintaining taxes for 
the perpetual payment of the interest, are incurred in pure loss. 
Whenever capital is withdrawn from production, or from the fund 
destined for production, to be lent to the state and expended 
unproductively, that whole sum is withheld from the laboring 
classes ; the loan, therefore, is in truth paid off the same year by 
these classes ; the whole of the sacrifice necessary for paying it 
off is actually made ; only it is paid to the wrong persons, and 
therefore does not extinguish the claim ; and paid by the very 
worst of taxes, — a tax exclusively on the laboring class. And after 
having, in this most painful and unjust of ways, gone through 
the whole effort necessary for extinguishing the Debt, the country 
remains chai'ged with it, and with the payment of its interest in 
perpetuity." 



426 TAXATION. 



CHAPTER XVIII. 

TAXATION. 

Taxation is the equivalent rendered by a people to their gov- 
ernment for preserving peace, enforcing justice, and aiding in vari- 
ous other ways the production of wealth. To the extent of the 
services thus performed, the government is a co-worker with the 
rest of the community, and therefore equitably claims its share of 
the products of each year's industry. The aggregate task is most 
economically performed through a Division of Labor, whereby one 
class of men devote themselves exclusively to making laws and 
administering them, thus enabling every other class to do its 
special allotted work without interruption, fear, or hindrance. 
In the case of the Post-Office, it is easy to see that the government 
renders a very important service for small compensation. If the 
work done by the tribunals of justice is not always so highly ap- 
preciated as it deserves, the reason is, that the feeling of security 
which they create is so widely diff.ised, and so seldom interrupted, 
that men are not aware how much it contributes to their happi- 
ness and well-being. Those who never have suits at law are quite 
as much indebted to the coiirts as those who frequent them, and 
therefore a tax upon the whole community rightly furnishes the 
means for their support. Arbitration is better than litigation, it 
is true ; but litigation is still better than open strife and violence. 
Most of the other departments of government may fairly be con- 
sidered as aids of the judiciary, or means of enforcing its decisions. 

Taxation in the abstract, therefore, is eminently just and expe- 
dient. The only difficulty is, how to apportion it equitably among 
the various classes of the people, so that each may bear its rightful 
portion of the burden with the utmost possible ease and acquies- 
cence. Adam Smith's four rules for the assessment and collection 
of taxes have been often quoted; but it must be confessed that 
they are vague and incomplete, and afford but little practical 
guidance for legislation. This was not his fault. As taxation 
needs to be applied under a great variety of circumstances, and the 
modes which have been contrived for applying it are numerous, 
»\\^ i»me of them complex and intricate, few rules can be laid 



TAXATION. 427 

down which will not be found to admit many exceptions and lim- 
itations. 

Adam Smith's first canon is, " The subjects of every state ought 
to contribute towards the support of the government as nearly as 
possible in proportion to their respective abilities ; that is, in pro- 
poi'tion to the revenue which they respectively enjoy under the 
protection of the state. In the observation or neglect of this 
maxim consists what is called the equality or inequality of taxa- 
tion." 

Secondly, " The tax which each individual is bound to pay ought 
to be certain, and not arbitrary. The time of payment, the man- 
ner of payment, the quantity to be paid, ought to be clear and 
plain to the contributor and to every other jDerson. Where it is 
otherwise, every person subject to the tax is put, more or less, in 
the power of the tax-gatherer." A still worse evil is, that the 
tax-payers cannot then make those nice calculations respecting 
future demands upon their resources, or the causes which will 
affect the prices of commodities and the future state of the mar- 
kets, upon which success in any commercial or manufacturing en- 
terprise largely depends. Adam Smith declares it to be proved 
from the experience of all nations, " that a very considerable degree 
of inequality is not near so great an evil as a very small degree of 
uncertainty." 

Thirdly, " Every tax ought to be levied at the time, and in the 
manner, in which it is most likely to be convenient for the con- 
tributor to pay it. Taxes upon such consumable goods as are 
articles of luxury are all finally paid by the consumer, and gener- 
ally in a manner that is very convenient for him. He pays them 
by little and little, as he has occasion to buy, the goods, and as he 
is at liberty, too, either to buy or not to buy, as he pleases, it must 
be his own fault if he ever sufters any considerable incouveniency 
from such taxes." 

Fourthly, " Every tax ought to be so contrived as both to take 
out, and to keep out, of the pockets of the people as little as possi- 
ble, over and above what it brings into the public treasury of the 
state." 

The first of these rules, as here stated without qualification, is 
far from being well founded. Taxation strictly proportioned to 
revenue or income would press with undue severity on the indigent 



428 TAXATION. 

and the industrious classes ; for the rich contribute out of their 
abundance, but the poor out of their hving. Hence it is now ad- 
mitted, on all hands, that the bare necessaries of life should not 
be taxed at all, while the articles which are properly regarded as 
comforts or decencies should contribute moderately, and luxuries 
should bear the heaviest imposts. Internal taxes are properly de- 
nominated excises, (excisa,) as they are the portion cut off from 
the value of commodities, or from the income of individuals, for 
the support of government. Now, the state has no moral right to 
cut off a portion of the poor man's loaf, but is fully justified in 
taking away some of the enjoyments of those who will yet have 
enough, and to spare. For this reason, a minimum of income is 
always declared exempt from taxation ; what constitutes a mini- 
mum, must be determined by reference to the customs of the peo- 
ple and other circumstances of the case. Moreover, to lay equal 
burdens on the idle and the industrious, even if it were just, 
would be highly inexpedient, as it would discourage labor, and tend 
to dry up the resources of the state. Those who have nothing 
to lose have comparatively little need of protection ; while wealth 
could not exist at all, except under the safeguard of the laws and 
those who administer them. In modern days, and in civilized com- 
munities, the machinery of government exists far more for the 
protection of property than of persons, and therefore property 
should bear nearly all the expense of maintaining that machinery. 
On the other hand, the indigent classes, by filling the army and 
navy, form the chief dependence of the nation in the case of war. 
Capitation or poll taxes are now seldom levied, and only at very 
low rates. 

" Equality of taxation, as a maxim of politics," says Mr. Mill, 
" means equality of sacrifice. It means apportioning the contri- 
bution of each person towards the expenses of government, so that 
he shall feel neither more nor less inconvenience from his share 
of the payment, than every other person experiences from his." 
Now it is evident that a 5 per cent income tax imposes the 
necessity of far heavier sacrifices on a person having an income 
of only $1,000, than on another whose income is $10,000. In 
this country, it would cut off from the former most of the com- 
forts, and, especially if he had a large family, some even of the 
necessaries, of life ; while the latter would be restricted only in his 



TAXATION. 429 

enjoyment of what may well be termed superfluities. The former 
would be prevented fi'om makiug any provision against old age or 
other disability, or for the support of his family after his own 
death ; while the latter could continue to amass capital by savings 
from income. Hence the proper sense to be put upon Smith's 
first maxim is, that " people should be taxed, not in propoi'tion to 
what they have, but to what they can afford to spend." As a 
principle applicable to all taxes, McCul'loch justly observes, that 
"equality of contribution is an inferior consideration. The dis- 
tinguishing characteristic of the best tax is, not that it is most 
nearly proportioned to the means of individuals, but that it is 
easily assessed and collected, and is at the same time most con- 
ducive, all things considered, to the public interests." 

Adam Smith's second maxim is so obviously correct as to need 
little comment. It has already been illustrated, (page 69,) in 
treating of the causes which favor the accumulation of capital. 
One of the greatest evils of the feudal system was the uncer- 
tainty as to the amount of the services due from the retainer to 
his lord, together with the uncertainty as to the time when they 
would be required. Frequent changes of the Tariff of customs 
duties and the taxes which produce the Internal Revenue, together 
with the perpetual fluctuation of prices caused by the state of 
the currency and the alterations of the banking system, are the 
heaviest discouragements which industry and capital have had 
to encounter, in this country, since 1862. The uncertainty thus 
created is an additional tax, a heavy and unequal one, which 
•diminishes, instead of increasing, the receipts of the Treasury, and 
enhances the cost of every enterprise, and the prices of all com- 
modities, by the necessary insurance against risk. 

The third maxim is best illustrated by the advantages which 
have followed the establishment of the Warehouse system. For- 
merly, the duties on imported goods had to be paid at the moment 
of their arrival, or a bond with sufficient securities had to be 
given for their future payment. But in the interval between the 
time of oi'dering the goods and that of selling them to advantage 
in this country, the altered condition of the markets, at home or 
abroad, may have made it advantageous to export them again. 
This could not be done without sacrificing the amount already 
paid for duties; or, if a drawback of these were allowed, there 



430 ^ TAXATION. 

would still be the vexation and delay of passing the merchandise 
again through the custom-house, with all the requisite precautions 
against fraud. The duties being payable at once, and not by in- 
stalments, as the goods were sold for consumption, their price was 
increased by the loss of interest on the capital thus advanced. 
Taxes on. consumption, such as all customs duties are intended to 
be, can be most conveniently paid at the moment of sale for con- 
sumption, the importer being only the intermediate agent be- 
tween the foreign producer and the domestic salesman. In order 
to raise funds thus to pay the duties in advance, the importer 
was often compelled to sell his goods at a ruinous sacrifice, imme- 
diately on their arrival. The principal ports of the country were 
prevented from becoming entrepdts for foreign commodities await- 
ing a market, and the carrying trade thereby suffered great dis- 
couragement. 

All these evils are now obviated by allowing the merchandise, 
when imported, to be lodged in the public Warehouses, under the 
joint locks of the importer and the government, where they may 
be kept without paying the duties, till it is found convenient 
to enter them for consumption at home, or to send them abroad 
again free of any charge but that for rent. Thus the goods are 
not taxed till they are sold ; and as the purchaser then pays the 
duties, the importer is not compelled to make any advance of 
capital. As all customs duties, like other indirect taxes, are 
ultimately paid by the consumer, the most convenient moment 
for exacting them does not arrive till the goods are ready to be 
sold, when the tax immediately becomes a portion of their price. 
Such articles as tea, coffee, sugar, and spices can be imported only 
at certain seasons, and in large quantities. If every facility is 
afforded for storing them, and the duties are exacted only little by 
little, as they are withdrawn for use, the government obtains from 
them the largest possible revenue, and imposes the least possible 
burden on the real tax-payers. 

Smith's fourth maxim, if fully carried out, requires that the 
taxed person should not be deprived either of money, or of any 
other advantage or means of comfort or indulgence, except so far 
as such privation directly and proportionally increases the revenue 
of the state. We are now considering tax-laws so far only as 
they are intended to fill the national Treasmry ; with their inci- 



TAXATION. ■ 431 

dental uses, to repress immorality or encourage domestic manu- 
factures, we have at present nothing to do. Considered simply 
as a means of obtaining revenue, any tax is impolitic and unfair 
if it can be collected only at great expense ; if it interferes with 
the taxed person's freedom of action and choice ; if it violates his 
right of privacy, through a vexatious perquisition into the state 
of his affairs ; and if it compels him either to give up altogether 
the consumption of the taxed article, or to resign the exercise of 
the taxed profession or trade. The whole cost of collection, it is 
evident, is a bm-den to the tax-payer, without any corresponding 
benefit to the state. 

In this respect, stamp duties are perhaps preferable to all others. 
It costs but a trifle to manufacture the stamps, and consumers 
take good care to provide themselves with them for their own 
secui'ity, or to give legal validity to their proceedings. But ex- 
cises or internal taxes, especially those on manufactures which can 
be prosecuted in a small way and at little expense, are very ex- 
pensive to collect ] for besides the direct cost of collection, a little 
army is constantly needed on the preventive service, to prevent 
evasion and illicit production. Customs duties are almost equally 
objectionable in this respect, as smuggling in such a country as 
the United States can never be entirely prevented, and may be 
carried so far as to make the tax virtually unproductive. 

Most instructive, however, is the difference between high and 
low rates of tax, showing the superior productiveness of the latter. 
An exorbitant tax, by diminishing the consumption, or cutting it 
off altogether, and by offering, as it does, a heavy bounty on 
smuggling and other forms of evasion, inflicts privation or severe 
loss on the tax-payer, at the same time that it actually lessens the 
receipts of the government. Hence the noted saying, that, in 
political arithmetic, two and two do not make four. Addition to 
the rate of tax often occasions loss to the revenue, and diminution 
of it frequently causes a great gain. So far as the former result 
comes from lessening the consumption, the consumer is deprived 
of his former comforts and enjoyments, commerce is restricted, 
and the Treasury suffers without benefit to anybody. So far as it 
is produced by the increase of smuggling and other illegal and dis- 
honest practices, the community are demoralized, and the consumer 
pays a heavy tax for the benefit of the smuggler and the cheat. 



432 TAXATION. 

The history of the English revenue laws during the last half- 
century is rich in instruction on all these points. Sir Robert Peel 
and Mr. Gladstone earned their best fame as statesmen through 
the able measures which they devised and carried out, consisting 
mainly in the repeal of taxes or in diminishing their rates, to 
lessen the burdens of the people, to remove the causes of discon- 
tent, to put almost an entire stop to smuggling, and, at the same 
time, largely to increase the revenue. Up to 1845, the average 
duty in Great Britain on sugar was over 80 per cent ad valorem ; 
the average quantity consumed by each person in the kingdom 
was then \'o\ pounds, and the net revenue obtained from the 
article was less than five millions sterling. In 1855, the duty 
was reduced to about 40 per cent; and before five years had 
elapsed, the consumption rose to 38 pounds a head, considerably 
more than double its former amount, and the revenue was in- 
creased to seven millions sterling. In other words, as a conse- 
quence of lessening the rate of tax, the consumers had twice as 
much sugar, and the government 40 per cent more revenue. The 
earlier and higher rate was a flagitious violation of Adam Smith's 
fourth maxim ; it diminished by one half the people's consumption 
of the commodity, not only without benefit, but with a positive 
and great loss, to the Treasury. 

To prove that this was not an exceptional case, many other 
instances might be cited, like the following. As recently as 1830, 
the duty on tea was 2s. 6d a pound, its average consumption was 
\lh. 5oz. per head, and the revenue obtained from it was consider- 
ably less than four millions sterling. In 1859, the duty was 
reduced nearly one half; the avera,ge consumption soon rose to 
2lbs. 12oz., and the revenue was increased to six millions. The 
history of the coffee duty was very similar ; when cut down one 
half, the consumption for each person was more than doubled, and 
the net revenue was augmented over 60 per cent. 

As these facts were made notorious in books and the news- 
papers, it seems incredible that Congress should have blundered 
as wofuUy as it did in adjusting the details of the revenue system 
to the exigencies of a great war and a heavy National Debt. The 
supposition of the members appears to have been, that the greater 
the number of taxes imposed, and the heavier the rates, the larger 
would be the revenue. Hardly any articles were admitted into 



TAXATION. 433 

the country free of duty, and the average rate on those which paid 
duty exceeded 48 per cent. Few professions, trades, or employ- 
ments could be exercised without paying for a license, and few 
legal or commercial papers could be passed as valid without a 
stamp. ■ Most manufactures were taxed, and some of them thrice 
over; first on the raw material, secondly on the process, and 
thirdly on the sales of the products ; — to say nothing of the in- 
come tax ultimately levied on the net profits, or of the State and 
municipal taxes on the capital invested and the real estate occu- 
pied. Different sorts of taxation were made to offset and justify 
each other. Heavy burdens on domestic industry rendered neces- 
sary additional rates of duty on foreign productions ; and as many 
of these imported articles were needed in the processes of manu- 
facture, the cost of production was gi-eatly enhanced, consumption 
fell off", and receipts into the Treasury were diminished as much 
as the people were oppressed. From 1864 to 1867, the United 
States were the most heavily taxed nation in the civilized world. 
The revenue collected by the government may not have been 
larger than it was in England ; but the amount paid by the 
people was probably twice as great. This state of things, of 
course, could not be endiu-ed long. A reform commenced in 1867, 
which, though it has reduced the burden of taxation perhaps one 
half, is still far from having reached completion. 

As the most striking instance that can be found of violation of 
all the principles of taxation which have yet been mentioned, take 
the inordinate assessment on distilled spirits. A heavy excise on 
spirits is always deemed proper, because it adds to the cost of a 
vicious indulgence, and has but little effect in diminishing the 
consumption, so that the returns to the revenue are very gi-eat. 
These two pleas, however, are not very consistent with each other ; 
a tax which has no effect in lessening the consumption does not 
correct the bad habit, but only makes it worse by rendering it 
more costly. Considered solely as a revenue measure, the imposi- 
tion of a very heavy tax on this article was a decided blunder. Its 
fruits were reaped, not to any great extent by the government, 
but by every smuggler who could paddle a canoe across the St. 
Lawrence with a keg of whiskey in its bows ; by every keeper of 
a dramshop, who, at the expense of only a few dollars, could set 
up an illicit still in his cellar or kitchen ; by every dishonest 
28 



434 ' TAXATION. 

trader, who could make a profit of over a dollar on the gallon by 
the sale of smuggled spirits, while his gains from the lawful traffic 
in the article were not a tenth part as large; even by most 
inspectors who were put to watch the distilleries, and who could 
obtain more thousands by shutting their eyes, than the govern- 
ment paid them hundreds for keeping them open. An army of 
coast-guards, informers, and detectives could not repress so gainful 
an illicit trade, surrounded by so peculiar facilities. 

" Few governments," says McCuUoch, " have been satisfied with 
imposing moderate duties on spirits, but partly in the view of in- 
creasing the revenue, and partly in the view of placing them 
beyond the reach of the lower classes, have almost invariably load- 
ed them with such oppressively high duties as have entirely de- 
feated both objects. The imposition of duties does not lessen the 
appetite for spirits ; and as no vigilance of the officers or severity of 
the laws has been found sufficient to secure a monopoly of the 
market to the legal distillers, the real effect of the high duties has 
been to throw the supply of a large proportion of the demand into 
the hands of the illicit distiller, and to superadd the atrocities of 
the smuggler to the idleness and dissipation of the drunkard." Ex- 
perience in the United States has fully confirmed the truth of this 
position. 

Before any tax was imposed on the production of this article, it 
was estimated that about 90 millions of gallons were annually dis- 
tilled in this country, one half for manufacturing and one half for 
drinking purposes, at an average cost of twenty cents a gallon. 
In 1864, the production being taxed at the rate of twenty cents a 
gallon for two thirds of the year, and sixty cents for the rest of the 
time, the proceeds of the tax exceeded 28 millions of dollars. For 
half of the next year, the tax was raised to $1.50, and then to 
$2.00; and the consequence was, that the demand for manufac- 
turing purposes almost entirely ceased, and the revenue fell to less 
than 16 millions. Then it recovered to its former amount, but 
soon fell off again, till, in 1868, the revenue from this source but 
little exceeded 13 millions. The law was then altered, the rate 
was reduced to fifty cents, and in 1869, the proceeds of this tax 
were over 45 millions. Thus a reduction of the excise to one 
fourth of its former amount made the revenue nearly three and a 
half times as large. While the rate was at the highest, the average 



TAXATION. 435 

price of the article in the market was less than the tax ; that is, 
less than $2.00 a gallon, thus leaving nothing for the cost of man- 
ufacture. As there is no reason to believe that the demand for 
drinking purposes was sensibly diminished, even by the most exor- 
bitant rate, it follows that the community were taxed on this one 
article, in 1868, about 90 millions of dollars, of which a little over 
13 millions were received by government, and more than 76 mil- 
lions by smugglers and cheats. The revenue service became ut- 
terly corrupt, and the morals of the people were seriously injured 
by the shameless parade, which was made before them, of enormous 
gains obtained by dishonest means. 

The trade with Canada afforded one significant intimation of 
the manner in which the frauds were practised. The year before 
the war, the export of Indian corn into that country did not 
amount to two millions of bushels; but in 1863, before the tax on 
spirits had become excessive, this amount was suddenly increased 
to four millions and a quarter. As Canada usually produces grain 
enough for her own use, and even for export, the corn was certainly 
not needed for consumption there ; but as distilling is there carried 
on to a great extent, the excise on spirits being very low, there 
can be no doubt that the corn was sent thither to be manufactured 
into spirits, which were then smuggled back across the line, and 
sold in our northern markets. , To impose a tax of 90 millions of 
dollars on the people of the United States, chiefly for the benefit 
of Canadian distillers and smugglers, was certainly a remarkable 
feat of legislation. 

The power of Congress to impose taxes is somewhat restricted 
by several provisions in the Constitution of the United States, one 
of which is, that " no tax or duty shall be laid on articles exported 
from any State." Another clause declares that " no capitation or 
other direct tax shall be laid unless in proportion" to the repre- 
sentative population, as determined by the census ; and a third 
provides that "all duties, imports, and excises shall be uniform 
throughout the United States." 

Two rules are thus laid down, — one of apportionment, applicable 
to all direct taxes, and the other of uniformity, which regulates 
those that are indirect. As the former makes population rather 
than wealth the measure of the tax to be levied, it bears rather 
harshly on those larger States, where the people are chiefly engaged 



436 TAXATION. 

in agriculture ; while the latter properly regards tax-payers in their 
individual capacity, and not as inhabitants of different States. 
But the first question to be answered is, Which are direct taxes, 
and which are indirect 1 

" A direct tax," says Mr. Mill, " is one which is demanded from 
the very persons who, it is intended or desired, should pay it. 
Indirect taxes are those which are demanded from one person, in 
the expectation and intention that he shall indemnify himself at 
the expense of another." Nearly all taxes on consumption, there- 
fore, are indirect ; for, though paid in the first instance by the im- 
porter, manufacturer, or producer, the whole burden of them ulti- 
mately falls on the consumer, through the enhancement of price 
which tney occasion. They are nominally imposed on commodities, 
such as tea, coffee, distilled spirits, and the like, for the sake of 
apportioning the assessment among the persons who use these 
articles, anu who are intended to be taxed to the extent of such 
use. It is often said that they are less burdensome than other 
imposts, because any person can avoid paying them by ceasing to 
use the taxed commodity, or to exercise the profession or trade 
which requires a license, or to give the receipts, deeds, or checks 
which need a stamp. True, he can thus avoid the direct payment 
of money to the Treasury ; yet he does not thereby escape the 
burden of the tax, but only transforms it into a privation of accus- 
tomed indulgences, or of the gainful employment or act, which 
would otherwise be open to him. The tax is properly indirect 
only when it is laid on an article which the tax-payer intends to sell, 
since thus only can he be repaid by demanding a higher price for 
it. When the impost, however, is intended to reach commodities 
already in use, or which have passed out of the hands of the mer- 
chant into those of the consumer, it is evidently a direct tax. 
Such are what are called, in England, the Assessed Taxes. In 
the United States, certain articles enumerated in Schedule A of the 
tax-law, such as gold or silver watches, pianofortes, and pleasure 
yachts, subject the possessor of them to an annual tax. 

A direct tax may be assessed either upon such commodities in 
use, the number and value of which are supposed to correspond in 
some measure to the wealth of him who owns them, or upon the 
person, property, or income of the contributor ; for he cannot, in 
either of these cases, shift the burden upon anybody else. Such a 



TAXATION. 435? 

tax, because open and visible, an immediate demand upon the 
pocket by a summons to pay, is apt to create discontent. But an 
indirect tax is insidious, because concealed ; we pay a higher price 
for the article, without thinking whether the increased expense is 
caused by a tax, or by the enhanced cost of production. Few per- 
sons in this country are at all aware how frequently and heavily 
they are now taxed, because they seldom see the tax-gatherer. 
But in truth, though invisible, he seldom leaves them. In 
every payment that they make they pay more, in every receipt of 
salary or wages they receive less, because this unseen Shylock 
always clutches his share. In every pound of sugar, salt, or tobacco 
that the people purchase ; in every foot of gas that they burn ; in 
every tool or implement that they use, — they pay a government 
tax. Every cup of tea, coffee, wine, beer, or spirits that is drunk, 
costs more because it is taxed. Lumber and iron are taxed, and 
we pay the tax in the form of heavier house-rent and a higher 
price of board. The very indirectness of the tax really makes it 
heavier ; for its rate is increased by the number of hands through 
which it passes before it reaches the consumer, and by every eva- 
sion of it which escapes detection. And yet such taxes do not ap- 
pear so burdensome as they really are, not only because they are 
hidden in the price, but because they are collected in amounts so 
small as to be almost imperceptible. The duties on tea, coffee, and 
sugar, yield an annual revenue exceeding 46 millions of dollars ; 
but Mr. "WeUs, the Commissioner of the Revenue, calculates that 
the average cost of them to each consumer is only about four cents 
a week. This is a striking case to show the advantages obtained 
by strict conformity to Adam Smith's third rule. 

The Constitutional restriction respecting the apportionment of 
direct taxes brings up a grave question respecting the legality of 
the income tax. This is unquestionably a direct tax, and there- 
fore ought to be assessed in proportion to the representative popu- 
lation, as determined by the census. But it is not. It is assessed 
by the rule of uniformity, according to which an income of 
$10,000 pays precisely the same amount, of whatever State the 
owner of that income may be an inhabitant. This is just, but it is 
not Constitutional. As Massachusetts is a wealthy State, the ag- 
gregate income of her citizens is very large. For the year ending 
July, 1866, she paid 30 per cent more income tax than Ohio, 



438 TAXATION. 

though, according to her representative population, she ought to 
haye paid only about half as much. Pennsylvania paid only 43 
per cent, though, according to the Constitution, she ought to have 
paid 143 per cent, more than Massachusetts. 

According to the rule of interpretation which seems to have 
been practically adopted by Congress and the Secretary of the 
Treasury, that only is a direct tax which is assessed immediately 
upon the States in their political capacities as units, or upon real 
estate. Thus, the tax-bill of July, 1861, imposed what it called a 
direct tax of twenty millions upon the States, distributing the 
sum among them in proportion to their representative population. 
Ohio was thereby required to pay over 1 1,500,000, Pennsylvania 
over $1,900,000, and Massachusetts but little over $800,000; 
and each State was left to collect its own amount in any way 
that it saw fit, or to allow the officers of the national government 
to collect it by an assessment on lands and buildings, — that is, 
on real estate. 

But no distinction is available, for purposes of taxation, between 
property and the income of that property. If a tax laid upon a 
farm is direct, a tax on the income or rent received for the use 
of that farm is equally direct. The same property and the same 
person is affected in either case; and it is only as yielding 
income that the farm is taxable at all. In England, the same 
assessment is called indifferently an income tax or a property 
tax. 

It cannot be doubted, then, that the income tax, in its present 
form, is unconstitutional. All that can be said in favor of it is, 
that the article in the Constitution which prohibits it is practi- 
cally obsolete, and ought to be repealed. This article was adopted 
only as part of a compromise, being intended as compensation for 
the rule which ascertains the representative population, by adding 
to the whole number of whites three fifths of the slaves. As 
there are no slaves now, this rule for apportioning the number 
of Eepresentatives in Congress is obsolete, and ought to be abro- 
gated, together with its appendage and offset, the rule for the 
apportionment of direct taxation. 

A graver objection to the income tax is, that it is unequal and 
unjust, because temporary and contingent incomes are assessed at 
the same rate as those which are permanent and certain. A per- 



TAXATION. 439 

son dependent entirely on a salary, or on professional earnings, 
the income in either of these cases being acquired by his daily 
labor, and terminating with his life, or even when age or infirmity 
incapacitate him for work, must contribute as much as one who 
receives the same amount annually from rents, dividends, or any 
form of invested capital, and is therefore not obliged to work for 
a livelihood. This is evidently unfair. The protection of persons 
and property is the object for which government exists, — is that 
for which we pay taxes as a compensation. If I own lands, 
buildings, railroad stock, etc., which yield me an income of $6,000 
a year, the government protects my person and $100,000 of my 
property ; if my neighbor's only income is one of the same amount, 
consisting in a salary, or his professional earnings from day to 
day as a physician or a lawyer, the government protects only his 
person ; he has no property which needs to be guarded ; he has 
none to bequeath to his children. Can it be said, then, that my 
neighbor and I contribute in proportion to our respective abili- 
ties, or in proportion to the aid and protection which we receive 
from the government, when we pay precisely the same income 
tax] Take another instance: A has $50,000 which he invests 
in a life annuity, giving him, at his age, $6,000 a year; B has 
$100,000, the whole of which he will leave to his heirs, and from 
which, for the present, he also receives $ 6,000 a year. Yet these 
two men pay the same annual sum under the income tax, though 
the property of one is just double that of the other, and he 
thereby receives twice as much protection. 

The income-tax law, both of England and America, sanctions 
this monstrpus inequality. Obviously the only fair method would 
be to capitalize these incomes, reckoning one class of them as 
perpetual annuities, and the other as terminable, ending at differ- 
ent periods, according to each party's expectation of life as deter- 
mined by the tables of mortality ; and then assess the tax in 
proportion to the capital as thus ascertained. The only objection 
to this method is, that it would render the assessment of the tax 
a complex, laborious, and uncertain process. But it is urged, 
that "the income which lasts only ten years pays the tax only 
ten years, while that which lasts forever pays forever." What is 
that to the purpose 1 Of course, when a thing ceases to exist, it 
must cease to be taxed. This is true even of what is called a 



440 TAXATION. 

permanent income ; for when the capital from which it was de- 
rived is lost or spent, the income can no longer be assessed. As 
one year, so far as the income tax is concerned, is precisely like 
another, if such a tax levied for one year is unequal and wrong, 
for a still stronger reason it is unequal and wrong when levied 
for any number of years. The prolongation of injustice is cer- 
tainly no compensation for the injustice. It is an obvious truth, 
that income alone ought not to bear so heavy a biirden as income 
and property united. The proper compensation would be that 
mere income should never be assessed separately, but a tax of 
corresponding weight should always be laid, at the same time, on 
the property from which permanent incomes are derived. 

These considerations will help us to a right view of one capi- 
tal feature of the income-tax system, as it was, in this country, 
whereby it was distinguished from the English law. Our system 
was a progressive one, the tax being increased, not merely in 
proportion to the amount of the income, but in a considerably 
higher ratio, three or four points being arbitrarily taken, at 
which the rate of taxation was made greater. All incomes below 
$600 a year were not taxed at all; those between $600 and 
$5,000 paid 5 per cent on the excess over $600; those between 
$5,000 and $10,000 paid 7^ per cent, and those over $10,000 
paid 10 per cent, on the same excess. English writer!? and legis- 
lators, upholding the principle of their aristocratic institutions, 
which favor in every manner the accumulation of property in the 
hands of a few, censure our progressive system, on the ground 
that it is not taxation, but confiscation, of the wealth of the 
rich, and that it disheartens industry and frugality by taking 
away the encouragement to amass riches. This last argument 
has not much weight ; for hardly any one will relax his efforts to 
obtain an income of more than $10,000 a year, by being made to 
see that he will have to pay annually 2|- per cent more tax than if 
he had only $6,000. The assertion, that an advancing rate of tax 
is of the nature of confiscation, would be true, if the advance were 
rapid, or were carried to a high point. To enact, for instance, 
that an income below $4,000 should pay nothing, but if over 
$5,000, it should contribute 20 per cent, and if over $10,000, 
50 per cent, would be robbery, not taxation. Such a law would 
defeat its own end, since very few would be willing to accumu- 



TAXATION. 441 

late more than $4,500 a year; surplus earnings beyond this 
point they ■would squander upon objects of mere caprice and ex- 
travagance, and the government would receive little or nothing. 
Hardly any one would be industrious or frugal, if all, or even 
if a very large fraction, of the fruits of industry and frugality 
were to be seized by their rulers. But that a rate which ad- 
vances slowly, and soon attains a maximum, is neither unjust nor 
impolitic, is proved by the example of the English themselves; 
for they too exempt all incomes below £100 sterling from any 
tax. And this is just, for the true measure of one's ability to 
undergo taxation is not what he has, but what he can spare. The 
very poor can spare nothing, and those who are worth but little 
can spare less, even in proportion to their income, than those who 
are very rich. This principle is universally admitted in the case 
of indirect taxation ; since all governments profess to tax necessa- 
ries very lightly, comforts moderately, and luxuries at a high rate. 
Then it is equally true for all taxation, whether direct or indirect. 
There can be no doubt, that a country clergyman or schoolmaster, 
with a salary of $1,500, who pays the government $25 a year, 
being 5 per cent on the excess over $1,000, is taxed quite as 
heavily in proportion to his abilities, as the man who annually 
pays $,1,000, and has $9,000 left for himself 

An advancing rate is justifiable, therefore, if it advances slowly, 
and stops at a low point. The precise limits cannot be' deter- 
mined by any general rule ; they must be fixed somewhat arbi- 
trarily, by sound discretion and a large view of the circumstances 
of the case. As the rates of interest and profits ai-e larger in 
any country, a higher and more rapid advance may be tolerated ; 
because men are tempted to accumulate more according as the 
balance of profit remaining to them is larger. The English law 
stops the advance at so low a point as to be unjust to persons 
of moderate income, and to favor unduly the very rich. The 
American rule, equitable and expedient here, would act injuriously 
in England, where the rate of profit, on an average, is not half as 
large as in the United States. I say the English law is unjust 
to small incomes, because, as we shall soon see, the indirect taxes 
take away vastly more in proportion from the poor than from the 
rich. It is true, that the rich contribute something more through 
the heavily taxed luxuries which they consume, bat not enough 



442 TAXATION, 

to make up for the immense advantage which they enjoy in 
respect to the tax on necessaries and comforts ; since most of the 
latter are objects of daily consumption, while great luxuries gen- 
erally are of infrequent use, as they only serve purposes of 
ostentation, and they also endure a long while. As the income 
tax, then, so far as it presses on terminable and contingent in- 
comes just as heavily as on those which are perpetual and certain, 
conceals real inequality and injustice under apparent uniformity; 
so, through its advancing rate on the larger incomes, it was really 
equal and equitable by ceasing to be uniform. 

Even in this country, however, the advancing rate was kept up 
only for three years. In 1867, Congress extended the exemption 
from any tax to incomes of $ 1,000 a year, and made the rate 
uniform at 5 per cent on the excess of any income over that 
amount. Probably the tax will soon be abolished altogether, both 
in England and the United States ; for, though a convenient im- 
post for the government, as it may be made very productive, and 
as its collection involves but little trouble or expense, it is always 
unpopidar; and it is practically unequal and demoralizing, be- 
cause it holds out a strong temptation to contributors to make 
dishonest returns. The sources of income are rents, dividends, 
profits, and wages or salaries. All of these, excepting profits, are 
probably reported, or may be ascertained, with tolerable correct- 
ness. But the tax cannot be equitably assessed on profits, 
without demanding from each contributor a frank and honest 
statement of the results of his business for the preceding year. 
Such statements comparatively few persons are able or willing to 
make. The amount which they will be required to pay must 
appear to them as a sort of penalty on the scrupulousness with 
which their returns are made out, and as giving an unfair advan- 
tage to many who will be less scrupulous. Cases of intentional 
fraud and perjury may not be very numerous, though there will 
always be too many even of such, when the temptation is so 
strong. But men easily deceive themselves, when their own 
interests are deeply concerned. Out of the gross gains of the 
year, so large a portion may be chai-ged off to replace supposed 
dilapidations of capital, wear and tear of machinery, or bad debts, 
that only a slender net income may remain to be taxed. " The 
income tax," says Goldwin Smith, " is a tax which ought to be 



TAXATION. 443 

resorted to only in time of war, or in some national emergency 
which excites the national spirit as much as war. It is only when 
the national spirit is so excited that there is a chance of true 
returns. In ordinaiy times, the income tax is a tax on honesty, 
a premium on dishonesty, a corrupter of national, and especially 
of commercial honor." 

Taxes on capital have been held to be far more objectionable 
than taxes on income, on the gi'ound that the latter are made 
good oiit of the greater economy in his expenditures which they 
enforce upon tlie contributor, while the former, by impairing the 
fund that sustains labor and is necessary for production, dry up 
the very sources of the country's revenues. The argument is a 
good one ; but I doubt if any taxes, whatever be their name, are 
ever paid out of capital, except those which are so exorbitant that 
they cannot be defrayed out of income. It is a great mistake 
to suppose, that, because taxes are rated proportionally to capital, 
therefore they must be paid out of that capital. So far as the 
contributor's means permit, he lumps together all the taxes which 
he is obliged annually to pay, however they may be denominated, 
and adds the aggregate to his ordinary necessary expenditures for 
the year, the whole to be defrayed out of his income, if practicable. 
In this country, nearly all the municipal taxes, and most of those 
collected by the individual States, are rated proportionally to 
the whole property of the respective tax-payers, including both 
real and personal estate ; yet no one supposes these imposts are 
paid out of any other fund than that from which national taxes, 
most of which are indirect, are defrayed. Stamps affixed to legal 
documents for the transfer of property are called taxes upon 
capital, because the costliness of them is usually proportioned to 
the whole value of the property so transferred. But they are no 
more necessarily paid out of the capital, than are the fees of the 
lawyers who are employed to draw up those documents. Even 
a tax on legacies and inheritances, if moderate in rate, is usually 
paid, I suspect, out of the income, for the first year or two, of the 
estate received, the heir or legatee having a strong inducement to 
keep the nominal amount of his bequest or inheritance unim- 
paired. But if as high as 10 per cent, I admit the correctness of 
Ricardo's doctrine, as stated in the passage which I here cite from 
J. S. Mill. 



444 TAXATION. 

" As Ricardo observes, if £100 are taken from any one in a tax 
on houses or on wine, he will probably save it, or a part of it, 
by living in a cheaper hoiise, consuming less wine, or retrenching 
from some other of his expenses ; but if the same sum be taken 
from him because he has received a legacy of £1,000, he considers 
the legacy as only £900, and feels no more inducement than at 
any other time (probably feels rather less inducement) to econ- 
omize in his expenditure. The tax, therefore, is wholly paid out 
of capital; and there are countries in which this would be a 
serious objection. But, in the first place, the argument cannot 
apply to any country which has a National Debt, and devotes any 
portion of revenue to paying it off; since the produce of the tax, 
thus applied, still remains capital, and is merely transferred from 
the tax-payer to the fund-holder. And the objection is never 
applicable in a country which increases rapidly in wealth." There, 
the only effect of abstracting a portion of people's savings from 
income through a tax is to leave room for more savings, without 
thereby diminishing the rate of profit. In such case, what the 
taxes really do is to subtract from a person's means, not of com- 
fort, but of enjoyment ; the amount paid in taxes, if it were not 
taken for that purpose, would be employed in gratifying some 
want or taste which, at present, remains unsatisfied As we now 
have a large National Debt, and capital is accumulated in this 
country more rapidly than anywhere else in the commercial 
world, it follows that no impost is objectionable here on the mere 
ground that it is a tax on capital. 

A house-tax, as Mr. Mill remarks, " if justly proportioned to the 
value of the house, is one of the fairest and most unobjectionable 
of all taxes. No part of a person's expenditure is a better crite- 
rion of his means, or bears, on the whole, more nearly the same 
proportion to them. A house-tax is a nearer approach to a 
fair income-tax than a direct assessment on income can easily be ; 
having the great advantage that it makes spontaneously all the 
allowances which it is difficult to make, and so impracticable to 
make exactly, in assessing an income tax ; for if what a person 
pays in house-rent is a test of anything, it is a test, not of what 
he possesses, but of what he thinks he can afford to spend." 
Misers, indeed, would escape it in great part ; but no taxes on 
expenditures can fully reach this unhappy class of persons. A 



TAXATION. 445 

more serious objection is, that a larger and more costly house may 
be needed, not because the occupant has more means, but because 
he has a larger family. To this, however, Mr. Mill replies, like 
a true Malthusian as he is, that such an occupant could not 
complain, because having a large family is the person's own choice, 
and, " so far as concerns the public interest, is a thing rather to 
be discouraged than promoted," — a proposition in which few 
Americans will be apt to agi'ee with him. In this country, apart 
from the ridicule which would follow the proposal of such a law, 
a tax upon bachelors would be far more equitable and expedient 
than a fine for having children. A man's life of celibacy, because 
it is too apt to be a selfish and even an immoral one, and as it 
avoids, to a considerable degree, taxation on expenditures, and 
contributes little to the national defence, might fairly be made to 
contribute much to the national Treasury. 

The gi-eat objection to a house-tax is intimated in the proviso 
by which Mr. Mill's general remark is qualified ; it could not be 
justly proportioned to the value of the house. Rent would be 
an insuflScient means of ascertaining this value, as the more costly 
houses in this country usually are not rented at all, but are oc- 
cupied by those who own them. The number and size of the 
rooms would not be a fair test, because there is great variety in 
the cost of the materials and the mode of construction. Houses 
also deteriorate by use, and are kept in different stages of repair. 
The younger Pitt tried to avoid these difficulties by putting a 
heavy assessment on windows, and thereby caused many windows 
to be entirely blocked up, and gave occasion to the satirical re- 
mark that he had put a tax upon daylight. Hearth-money was 
formerly collected in the sister kingdom, and the people com- 
plained that it put out half the fires in Ireland. 

The considerations in favor of a house-tax show the gross un- 
fairness of one provision in the law regulating the income tax in 
this country, whereby any tenant is allowed to deduct his rent 
from his taxable income, and one who occupies his own house is 
charged nothing for its annual value. The result is, that a com- 
paratively poor man can deduct perhaps $200 from the sum on 
which he is to be assessed, while his wealthy neighbor secures an 
abatement which, in many cases, exceeds $ 5,000. Justice would 
demand that a fixed sum, not exceeding $ 300 a year, might be 



44G TAXATION. 

deducted for rent by every householder; and then the yearly 
value of the house and grounds which he occupied should be 
added to his assessable income. 

There is one tax imposed by our present Revenue Law which 
deserves high commendation, and admits of being largely increased 
in rate without becoming burdensome or creating discontent. I 
refer to the impost on legacies and successions to real and personal 
property, whether by wiU or inheritance. Leaving sums not ex- 
ceeding $1,000 untaxed, one per cent on the whole value is made 
payable on coming into succession by every heir or legatee, if such 
person be a child, parent, brother, or sister, of the deceased ; of two 
four, or five per cent, if more remote of kin ; and of six per cent, 
if a stranger in blood, or a body corporate. Property passing to 
the husband or wife, however, is exempt from tax. In its main 
features, this assessment conforms to the present law in England 
upon the same subject; but the tax here is more equally and 
equitably distributed. Collateral succession has always been re- 
garded as a proper subject for considerable taxation, a tax of one 
twentieth, or five per cent, being levied upon it by the old 
Roman law. Within the last half-century, political economists 
and philosophical jurists, almost with one voice, have argued 
strongly in its favor, and most of them advocate an increase of 
the tax, even to a very high rate. The reasons are obvious. 
Such a tax imposes a burden on nobody ; from no person does it 
take anything which he before possessed; it does not even dis- 
appoint any reasonable expectation. The law merely steps in to 
determine the amount of what is to the collateral heir or legatee, 
or the stranger in blood, an unexpected, or at any rate a con- 
tingent, benefit or godsend. If the deceased had children who 
inherit, or if he makes a will and endows a college or a cat with 
his whole property, his kindred, whether near or remote, have no 
cause of complaint, and make none. If neither of these contin- 
gencies is fulfilled, the collateral heirs expect just what the law 
allows them, and no more. If there are four of them in the same 
degree of kinship, each one of them will expect only one quarter 
part of the amount which the law allows to be distributed. If 
ihere is but one, he will expect the whole sum thus allowed, and 
ao more. The law of itself, therefore, determines the expectations 
df the collateral heirs or legatees ; of course, it cannot falsify any 



TAXATION. 447 

expectation, or create auy disappointment or sense of hardship. 
As much cannot be said of any other tax whatever. 

For these reasons, thinkers so eminent as Jeremy Bentham and 
John Stuart Mill have advised that, when there is. no immediate 
heir and no will, the law should take all, — that the estate should 
escheat to the commonwealth, just as it now does if not even any 
collatei-al heirs can be found ; and Mi*. Mill would even restrict 
within very narrow limits, as has long been done in France, the 
right of any person to make a will. I do not go so far as this ; 
for such a course, it might be feared, would considerably diminish 
the inducements to amass capital. But the very strong reasons 
alleged would certainly justify a considerable increase of the rates 
as now by law established. Even the direct heirs, though they 
expect, and have been bred up in the expectation, that the main 
pi'operty would be ultimately theirs, had no right to believe that 
they would come into possession in any particular month or year. 
The law, then, might fairly take what the clergy call " the first- 
fruits " of the estate, — that is, the first year's income of such 
portion of the property as defrayed the original holder's personal 
wants during the last year of his life, — thus leaving the heir in 
as good a position as he would have been, had his parent lived a 
year longer. This might equal, on an average, a 5 per cent in- 
heritance tax for children or a widow. On the collateral heirs, 
the rate might be increased, as now, in proportion to remoteness 
of kinship, till it reached 15 or 20 per cent for those who were 
strangers in blood. A very large revenue might be thus obtained 
without biirdening anybody, occasioning no discontent, at a .min- 
imum expense of collection, and with hardly a possibility of 
evasion, the tax covering not merely inheritances, but free gifts 
made in view of approaching death. 

It is difficult to tell what proportion the du-ect ought to bear to 
the indirect taxes. The former are easily collected, do not fre- 
quently admit of evasion, and the burden of them falls in the 
main, as it ought, on property ; but they are unpopular, because 
the demand of them by the tax-gatherer admits of no disguise or 
concealment. To avoid this odium, governments generally prefer, 
instead of taking openly a part of a man's income, to tax the 
articles on which this income is expended. These indirect taxes, 
lis we have seen, because hidden in the enhanced price of com- 



448 TAXATION. 

modities, seldom generate discontent, and are collected in driblets, 
in the manner most convenient to the contributors ; but the 
burden of most of them falls much more on indigent and working 
people than on the opulent and middle classes. A man's con- 
sumption of the necessaries, and most of the comforts, of life is 
far from being proportioned to his income ; it depends much more 
on the size of his family. Taxes on tea, coffee, sugar, distiUed 
spirits, malt liquors, and tobacco, exact nearly as much from a 
person of very moderate mean^ earning perhaps not more than 
$1,000 a year, as from one whose income is forty or fifty times as 
large. The duties, levied exclusively for revenue purposes, on the 
first three of the articles here enumerated, and the excise on the 
other three, produced, in 1869, 120 millions of dollars, or more 
than one third of the whole sum then collected in taxes by the 
national government ; and at least nine tenths of this enormous 
sum was a tax on the poor. Too large a share, moreover, of 
those duties which are levied in part to obtain revenue, and 
partly to protect domestic manufactures, falls on that portion, far 
the larger one, of the community who are least able to bear the 
burden. Thus, to mention only a few instances, the tax on the 
importation of plain cotton and woollen goods, on hides, leather, 
rice, and coal, on iron and lumber, — the efiect of assessing these 
last two being to increase house-rent and the price of board, — 
takes far more from the aggregate earnings of the working classes 
than from the abundance of the rich. As in the cases cited before, 
it is a tax proportioned to population rather than to property. 

The inequality and unfairness in distributing the burden of 
indirect taxes become still more striking, when it is considered that 
many of them are proportioned, not to the value of the articles 
assessed, but solely to their quantity. Specific taxes, as they are 
called, are levied at so much on the pound, yard, or bushel of the 
commodity, irrespective of the difference in quality and cost of 
its various sorts and kinds ; while ad valorem taxes, as their name 
imports, are assessed proportionally to the value of the article, at 
so much per cent. Now nearly all the duties and excises men- 
tioned in the preceding paragraph are specific. What is the 
consequence 1 The poor man's cup of inferior tea or coffee is 
taxed about 100 per cent of its value; the rich man's consump- 
tion of the more costly article pays only from 25 to 50 per cent. 



TAXATION. 449 

And so in regard to the other commodities ; exorbitant rates are 
levied ou necessaries and comforts, while luxuries escape with a 
light tax. It is said, indeed, that taxes must be made specific, be- 
cause, if ad valorem, they are subject to evasion through fraudulent 
appraisements. This is perfectly true ; but it is little consolation 
for one who is unfairly taxed beyond his means, to be told that 
the Treasury could not easily collect so much revenue without 
committing this injustice. Government has no right to make 
justice subservient to expediency, or to sacrifice the interests of 
the contributors for its own convenience. 

It does not follow from these considerations, that indirect taxes 
should never be imposed, or that they should never be made 
specific. When the exigencies of the country are great, and a 
large revenue must be had, recourse to such imposts is necessary, 
in order to divide and distribute the weight of taxation, the bur- 
den of which, if it fell all on one spot, would be intolerable. Mr. 
Baxter wittily compares the weight of taxation to that of a 
soldier's knapsack, which is supported, not by one^ but many 
straps, in order to ease the pressui'e by dividing it between the 
back, chest, and shoulders. But the necessary inequality and un- 
fairness of indirect and specific taxes on necessaries and comforts 
are a strong argument for limiting their number, for having re- 
course to them only in cases of emergency, and for compensating 
their burdensomeness to the laboring classes by direct taxation 
of property at ascending rates. The objections which may be 
made to a graduated income tax, or to heavy assessments on lega- 
cies and inheritances, cease to have any weight, when such direct 
taxation is regarded only as an offset to the greater pressure of 
indirect taxes upon the poor. Adam Smith's first principle of 
taxation is violated by taxes on necessary expenditures, inasmuch 
as they compel people to contribute in proportion, not to their 
abilities, but to their wants and imperative desires, in regard to 
which all men are equal. 

Turn the matter as we may, any tax, taken by itself, is objec- 
tionable, and may oppress one portion of the community more 
than another. The best that can be done is to make a rough 
approximation to equality, by multiplying the kinds of taxation, 
and thereby so distribute the burdeii that no one class shall suflFer 
more than another ; and for this end, it will always be necessary 
29 



450 TAXATION. 

to place the heavier weight on the shoulders that are better able 
to bear it. The very fact that taxation is always unequal and 
oppressive, and, when considerable in amount, must be so appor- 
tioned as to distress the working classes, furnishes a strong argu- 
ment for paying off the National Debt, instead of funding it with 
a view to permanency. Granted that it cannot be speedily paid 
off without assessing capital to a considerable extent ; this is 
better than allowing it to continue forever as a tax upon in- 
dustry. 

Taxes upon banks are direct ; the stockholders cannot throw 
the burden of them upon their customers by charging more for 
loans, since the rate of interest depends upon the average rate 
of profit throughout the country, and upon the spirit of enter- 
prise in trade, both of which are independent of the action 
of the banks. Moreover, as already said, the stockholders are 
themselves, to a great extent, their own customers ; for the vary- 
ing demands of their business make them the most frequent 
applicants for loans. Persons of small means often invest their 
little capital in banks ; but the larger portion of the stock in 
them is held by those who are best able to bear taxation. 
Especially the. National Banks, in view of the immense gratuity 
which they have received from the government, and of the fact, 
that, ever since they were instituted, their average dividends, 
outside of taxes and all other demands, have been more than 10 
per cent, ought to contribute far more than they now do to the 
national Treasury. 

Even the taxes upon railroads must be regarded, at least to a 
^considerable extent, as direct. They cannot be made good by 
demanding higher tolls for transportation, because, as repeated 
experience has shown, higher rates of charge are sure to be 
followed by more than a corresponding diminution in the amount 
of travel and traffic. As railroads in the United States, for 
many years, have yielded large profits, and their gains must 
increase with the rapid growth of the country in population and 
wealth, there is too great a rage for the construction of new ones 
in unpromising localities. It is doubtful, therefore, whether a 
heavy tax would not be a benefit rather than an injury to those 
already in operation, by discouraging competition from new lines, 
and keeping down fluctuations in railroad stocks. 



TAJCATION. 451 

We have now the materials for ascertaining, with some approach 
to correctness, the proportion of direct to indirect taxation in the 
United States. For reasons ah-eady given, only the internal taxes 
on income, stamps, legacies and successions, banks, articles in 
Schedule A, and railroads, can be regarded as direct. In 1869, 
the revenue from these sources amounted to about 61 millions. 
The customs duties, in the same year, yielded 180 millions in 
gold ; reducing this to currency, allowing the average premium 
on gold to be 33J per cent, and adding the remainder of the 
internal revenue, we have over 338 millions as the aggregate of 
indirect taxes. In other words, 15.25 per cent of the whole reve- 
nue obtained from taxation was derived from direct taxes, while 
the indirect yielded 84.75 per cent. In most countries of Conti- 
nental Europe, according to Mr, Levi, the average proportion of 
direct to indirect taxation is 33.75 to 66.25 per cent; in England, 
he says, the pi'oportion is 16.5 to 83.5. The proportion of indi- 
rect taxes in this country is evidently too large ; it causes too 
much of the biarden to fall on labor, and too little on capital. 

It is not easy to say with certainty what induced the framers 
of the Constitution absolutely to prohibit taxes on exports. But 
as the clause which forbids them is immediately followed by the 
enactment, that " no preference shall be given, by any regulation 
of commerce or revenue, to the ports of one State over those of 
another," we may conjecture that their purpose was to secure equal- 
ity of privileges to all the States. As some of the staple produc- 
tions of the country, such as rice, sugar, tobacco, cotton, and hemp, 
are raised only in a portion of the States, a tax on exporting them, 
it was thought, would fall on those States alone. As it was sup- 
posed that the foreign demand for these commodities would be 
lessened by the enhancement of price occasioned by the tax, a 
serious injury to them would result. If we would sell to foreign- 
ers, we must aim to sell as cheaply as possible, or rival countries 
will obtain possession of the market by offering their goods at a 
lower price. 

So they will, if the commodities taxed can be produced with 
equal advantage elsewhere. But if we have a virtual monopoly 
of the article, through exclusive or special advantages for pro- 
ducing it, and if foreigners are virtually unable to do without it, 
then an export duty is the most advantageous tax imaginable, as 



452 TAXATION. 

it falls entirely upon the foreign purchaser. Thus, China has been 
able to collect a large revenue by an export duty on tea, without 
drawing a penny from the pockets of its own people ; British India 
has done the same with opium, Peru with guano, and Naples with 
sulphur. British India receives four millions sterling, or nearly 20 
millions of dollars, from its export duty on opium, the whole of 
which, of course, is really paid by the Chinese. Our American 
cotton is an article which European manufacturers must have, even 
at the price of sixty cents a pound in gold, which they were obliged 
to pay for it during the war. The cost of its production before 
the war was so low as to enable it to be sold at ten cents a pound ; 
and the quality exported at this price was over 1,700 millions of 
pounds. How much the production will be diminished by the 
transition from slave to free labor, it is, of course, impossible to 
conjecture. But as the crop in 1869 had risen again to about 
1,250 millions of pounds, it is a very reasonable estimate, that 
within a few years, the quantity exported may become two thirds 
as large as it was in 1860, though the expense of raising each 
pound should be doubled. Then an export duty of five cents a 
pound would produce a revenue of nearly 57 millions of dollars, 
and the article could still be offered in Liverpool market for 
twenty-five cents a pound. A heavier duty than this would 
probably reduce the demand, and make the cotton from British 
India a formidable competitor. 

But then what becomes of the Constitutional prohibition of a 
duty on exports 1 To avoid straining any further the language 
of this great charter of our liberties, which, as recent experience 
seems to show, may be made to mean almost anything, or nothing, 
it seems that the end in view might be obtained without any 
export duty whatsoever. Lay an excise tax of five cents a pound 
on the production of raw cotton, and then allow a drawback of 
half, or the whole, of this impost on all that is manufactured or 
consumed within the country. With such an advantage, our cot- 
ton spinners and weavers could command the markets of the 
civilized world. An internal-revenue tax, first of two and a half, 
and afterwards of three, cents a pound on raw cotton was imposed, 
and the latter rate yielded, on an average for two years, over 23 
millions annually, though the crop was then considerably smaller 
than it has since become. The amount thus obtained was nearly 



TAXATION. 453 

the whole revenue derived in those years from the Southern 
States. But the tax was then repealed, from an over-hasty ap- 
prehension, as it seems, that it might impede domestic production 
and be an xmdesirable stimulus to the foreign cultivator. 

One argument for heavy taxes on luxuries and articles of orna- 
ment and show has not received the attention it deserves. There 
is a remarkable exception to the principle, that cheapening the 
price will increase the demand, or augment the number of con- 
sumers. It is not true that purchasers will always buy what they 
can buy cheapest. If the pursuit of wealth, or, what is the same 
thing, the desire to make savings, were always the ruling motive, 
the principle would hold good. But it is not ; in many instances, 
the ruling motive is, notoriously, not the love of gain, but the 
love of display. Through the rivalry of individuals in the display 
of wealth, some articles are prized only on account of their high 
cost. Cheapen them, and the demand for them by the rich will 
not be enlarged, but diminished ; for the consumption of them will 
then be abandoned by this class of persons, who wall immediately 
seek out other and more costly articles wdth which to gratify their 
love of ostentation. Render them very cheap, and they will go 
out of use altogether. If pearls were as common as oysters, pearl 
bracelets and brooches would never be manufactured. If equally 
serviceable articles of intrinsically higher -cost cannot be found, 
the aid of that capricious goddess. Fashion, will be called in to 
create a factitious enhancement of the pi'ice of certain commod- 
ities. The demand for these commodities is, therefore, increased 
by the addition to their price ; when cheap, they were neglected ; 
when they have become scarce and high in price, they are eagerly 
sought after, and persons even of moderate means will submit to 
considerable sacrifices in order to obtain them. And the cases are 
neither few nor unimportant in which the rule is thus inverted. 
Most of the finer manufactures of cotton, wool, and silk, together 
with fine cutlery, expensive pieces of furniture, and nearly all the 
fancy articles which become articles of aesire because they are 
fashionable, belong to this class. Lower their price, and the 
demand for them is diminished. 

What Economists term the demand consists of two elements, — 
the ability to purchase, and the desire for the thing itself,- or the 
disposition to purchase. These two must coexist in order to con- 



454 TAXATION. 

stitute an effectual demand, and thus affect the price. In the case 
of the poorer classes, inchiding persons of moderate means, it is 
the want of the former element, the ability, which limits the 
demand. In this case, then, lower the price, and the consumption 
is increased. But for people of wealth, it is the lack of the second 
element, the desire or disposition, which restricts the demand ; to 
diminish the price will not increase their consumption of the 
commodity, but in most cases will lessen it, as the possession of 
the article will no longer be a token of wealth. 

Obviously, then, in respect to all articles which are used only 
for purposes of ostentation and display, the only strong argument 
against a protective tariff, that it operates as a tax upon con- 
sumers by increasing the price of the commodities on which a 
duty is imposed, ceases to have any weight whatever. If the 
duty were removed, consumers would save nothing; they would 
abandon the use of the cheapened commodity, and seek out one 
of higher cost, not because it is of superior quality or convenience, 
but because its high price renders the possession of it a token of 
wealth. If fine cotton goods were so high in price as to content 
the love of display, costly silks would not be sought aft^r, and 
the labor required for the production of them would be saved. 
An expensive cotton fabric gratifies the spirit of ostentation, of 
rivalry, of showing one's self as well off as one's neighbors, just as 
effectually as a cheap silk. Taxes upon this class of luxuries, 
then, cost the community nothing ; the revenue thus obtained is an 
absolute saving. Even if the finest American cottons were 50 per 
cent dearer than English goods of the same quality, a duty of 50 
per cent on the imported commodity would be no tax upon the 
consumer. With the duty, he would buy the American article at 
$1.50 a yard, and it would answer his only purpose, — would 
gratify his love of display. Without the duty, despising the cheap- 
er article, he would purchase an English or French silk at $1.50 a 
yard, and would be no better off than in the other case ; while the 
government would lose the whole proceeds of the tax, American 
manufactories would be stopped, and American workmen thrown 
out of employment. 

I am no advocate of sumptuary laws for their own sake. But 
taxation itself being essential for the support of government, such 
an apportionment of the indirect taxes among various comxpodities 



TAXATION. 455 

as will discourage idle, wasteful, and luxurious consumption, is 
clearly expedient and just. The aggregate amount expended in 
this country even for such articles of luxury as gratify taste, and 
are not used merely for purposes of ostentation, is increased by 
diminution of their price, and lessened by augmentation of that 
price. If, for instance, the price of the finer manufactures of 
cotton and wool should fall one half, people would purchase more 
than twice as many of them. There would then be no saving to 
the community, but an actual loss ; for the aggregate expenditure 
of the country in such goods would be increased by the excess 
over what was enough to make up twice the foraier number of 
purchasers. On the other hand, double the price, and there 
would be less than half the former number of pm'chasers, and 
consequently a real saving to the community. If, then, we make 
the more costly manufactures for ourselves, instead of obtaining 
them from abroad, their price will be somewhat enhanced, there 
will be a somewhat smaller aggregate expeuditm-e upon them, and 
the prices obtained in foreign markets for our exports will be 
increased by the diminution of our imports, and to the full extent 
of that diminution. Silks, very fine cottons and woollens, expen- 
sive cutlery, articles of virtu and bijouterie, and the like, are neces- 
sarily consumed unproductively ; we gain nothing, we even lose, 
by cheapening them. If the wages of labor can be kept up by 
raising the prices of such articles, we gain all round. 

Respecting the effect of customs duties in enhancing the price 
of imported goods, an important distinction is pointed out by the 
able Special Commissioner of the Revenue, Mr. D. A. Wells. If 
the demand for the imported article, he says, " be constant and 
nearly equal to the supply, the consumer, through the enhance- 
ment of price, pays the entire duty, and generally some small 
additional percentage in compensation to the importer for the 
advances made by him on account of the duties, or, as at the 
present time, in the way of insurance against fluctuations in the 
value of the currency. On the other hand, in case the supply of 
the imported article tends to exceed the demand," and this is the 
case at present with the supply of nearly all English manufac- 
tured articles, and " especially if demand is checked by reason of 
an enhancement of price resulting from an increase of the tariff, 
the importer will often abate prices in order to maintain his mar- 



456 ' TAXATION. 

ket." The practical result in this case will be, that the payment 
of the duties will be divided more or less unequally between the 
foreign producer and the home consumer. Thus the heavy duty 
imposed in 1867 on some varieties of woollen goods so increased 
the stocks of them in foreign markets, " that prices receded to an 
extent nearly or quite equivalent to the increase of duties." 

Customs duties on raw materials, imported for purposes of 
manufacture within the coimtry, are so obviously inexpedient that 
they would never be imposed, except from a vague impression 
that the domestic producer ought to have an advantage equiva- 
lent to that which the domestic manufacturer obtains from the 
duty on the importation of the foreign manufactured article, or 
that any one article ought to be taxed about as much as another, 
in order that the aggregate burden of taxation might be equally 
distributed among all classes of the people. But this is the rea- 
soning of ignorant or short-sighted persons, who cannot see that 
to impose duties indiscriminately is only to duplicate, or increase 
in some higher ratio, the burden of taxation, and to sacrifice many 
of its indirect advantages or compensations, without any gain to 
the Treasury. Duties upon imported raw materials are equiva- 
lent to a tax' upon domestic manufactures ; and this amounts to a 
tax upon the labor, especially the skilled labor, of the country, or 
to a general reduction of wages. England is indebted for the vast 
development of her manufactures to the great facilities which she 
has afforded for the importation of raw materials, — more even 
than to the large command which she has of some of these mate- 
rials, such as iron and coal, at home. A tax upon such materials 
as cannot be produced at all within the country, though they are 
needed for the manufacture of other products, is a great discour- 
agement to domestic industry without gain to anybody. Other 
raw materials would not be imported at all, if the domestic supply 
of them were not insufficient ; and the fact that it is insufficient 
is attributable to the scarcity and high wages of labor. 

The natural advantages of this country for raising any sort of 
crude material adapted to her soil and climate are so immense 
that she has no foreign competition to dread. The home producer 
is secure in his possession of the home market ; he is on the spot 
where the article is needed, and the great bulk or weight, in pro- 
portion to their value, of such articles as lumber, salt, hides, pig- 



TAXATION. 457 

iron, and even the coarser wools, prevent them from being brought 
from a distance, except at such cost as will afford him all the pro- 
tection that he needs. To tax the importation of them is to 
enhance in two respects the price of the articles into which they 
are manufactured : first, by the additional cost of the raw material ; 
and, secondly, by the higher protective duty which will then be 
needed to guard the home manufacturer against his rivals abroad. 
Thus the home producer of the raw material will have gained 
nothing ; the higher price which he will have to pay for all manu- 
factured goods will more than offset the advantage gained in 
disposing of his own products. To tax pig-iron, hides, and lumber 
20 per cent will be to add 40 per cent to the cost of houses, 
implements, ships, boots and shoes, and every other article made 
out of these rude products. It will be to tax skilled industry 
twice over, for the sake of an imaginary benefit to rude labor. 

The amount, estimated in gold coin, received from taxation by 
the government of the United States, for the year ending July, 
] 869, was almost exactly 300 millions. The corresponding amount 
for Great Britain and Ireland, excluding several sources of revenue 
which cannot properly be regarded as taxes, for the year ending 
April, 1869, was about 325 millions of dollars. But then the 
local taxation, only about 90 millions of dollars in the United 
Kingdom, is much greater in the United States. There are no 
means for estimating it with accuracy ; but the aggregate of State 
and municipal taxation here cannot safely be taken at less than 
half of the amount levied by the national government ; that is, it 
does not probably fall short of 150 millions in gold. Taking 
national and local taxation together, the rate per capita in Eng- 
land is $13.80; in the United States, assuming the population to 
be 39 millions, it is $11.54. 

But the relative weight of taxation is to be estimated, not so 
much by the extent of the population on whom it rests, as by 
their comparative ability to bear it ; this ability consisting partly 
in the wealth which they have already accumulated, but still more 
in the annual productiveness of their industry. Unqiiestionably 
the English people have amassed a much larger capital than ours ; 
but there are strong reasons for believing that the aggregate 
amount of savings from income, or, in other words, the annual 
addition to previous capital, is now larger in the United States 



458 TAXATION. 

than in any other country in the world. Nowhere else is industry 
so productive, nowhere else is so large a portion of the earnings 
of industry saved from unproductive consumption, and added to 
the accumulated fund which fosters and facilitates future labor and 
enterprise. The proof of this assertion might be safely rested on 
two facts alone : the first is, that the rate of interest, and, of course, 
the profits of capital, which are proportional to the rate of interest, 
are here twice as large as in Great Britain ; and the second is, that 
the enormous expense of the war of the Great Rebellion was en- 
tirely defrayed out of the surplus earnings, — the net product of 
the national industry, — during the four years of its continuance. 
Now, taxes are necessarily paid out of this fund of annual savings ; 
and the larger the fund, the more easily will the burden of taxation 
be supported. The mere amount of the burden, therefore, is not 
formidable, especially as the increase of population, more than keep- 
ing pace with the growth of opulence, is adding 35 per cent to 
the efiicient strength of the country every ten years, and, of course, 
is lessening the pressure of the weight on any one person nearly in 
that proportion. 

But there is another circumstance of equally great importance 
to be taken into view, in estimating ability to bear taxation. The 
wide distribution of wealth, which approaches equality here more 
nearly than in any other nation, makes Americans the most taxable 
people in the world; that is, a given tax, in proportion to the 
number and wealth of the people, will here yield more, without 
distressing anybody, and causing less discontent, than in any 
other country on the globe. A tax is more productive and less 
annoying, wherever the middle classes, or those who are neither 
very rich nor very poor, are relatively more numerous ; the poor 
can bear but little, the rich are unwilling to support their share, 
because it is a large one ; and there are, moreover, but few modes 
of taxation which take from the rich in anything like a full pro- 
portion to their means. Heavy taxes, if they are uniform, must 
bear heavily upon the very poor, whom they restrict in the use of 
the necessaries, and almost wholly deprive of the comforts and con- 
veniences, of life. Hence, when the number of the poor is relatively 
large, such taxes cause great and well-founded discontent. On the 
other hand, the rich are jealous of taxation which is proportioned 
to their means, and especially of that from which the bulk of the 



TAXATION. 459 

community are free ; for, they argue, it partakes of the nature of 
confiscatiou of property, and even takes away one great induce- 
ment to industry, by discouraging the accumulation of wealth. 
Moreover, when riches, as they are in England, are mostly inherited, 
they bring with them a proportionate scale of expenditui'e and 
show, leaving a smaller sm-plus really at command of their owners 
than is possessed by many persons of comparatively moderate 
means. Reckoning the degree of poverty by the embarrassments 
and mortifications which it occasions, some of the poorest men in 
England are the holders of large and deeply mortgaged estates ; 
and perhaps the sorest trials to which these are subjected are the 
visits of the tax-gatherer. 

It would be hardly possible to exaggerate the difference between 
England and the United States in respect to the distribution of 
wealth. There, 60,000 persons own nearly all the land, and less 
than 250,000 possess four fifths of the whole property, both real 
and personal. Mr. Baxter, the latest and best authority on the 
subject, estimates that " the upper and middle classes," counting 
their families with them, contain but 22 per cent of the whole 
population, thus leaving over 23 millions for what he calls " the 
manual -labor class," who are either entirely dependent vipon 
wages, or engaged in occupations in which their gains are as small 
as if they worked for hire. In the United States, the number in 
the coiTesponding class cannot be relatively more than half as 
large ; and there are certainly more than 60,000 land-owners in 
New England alone. 

But there are special causes which make heavy indirect taxa- 
tion, whether by customs duties or excise, a serious evil for the 
United States. Great Britain is an island of limited dimensions 
and dense population, where the administration is thoroughly 
organized, and the police and preventive service are well drilled 
and efficient ; there, consequently, it is comparatively easy to pre- 
vent smuggling, aud even to make evasions of excise diflficult and 
infi'equent. On the other hand, the United States are of vast size, 
stretching across a broad continent, with a coast-line measuring 
several thousand miles, and a northern frontier of immense length, 
the boundary often being only a river or an imaginary line that 
can be easily crossed. With such a frontier, how can smuggling 
be prevented, especially when there is so much temptation for it as 



460 EFFECT OF SPECULATION ON PRICES: 

is offered by a tariff imposing a duty on nearly all imported goods, 
the average rate being as high as 48 per cent ] Under such cir- 
cumstances, the people probably pay at least one fourth more for 
taxes on imports than the government receives. 

Under the excise system, also, evasion and fraud are frequent, 
and probably can never be in any great degree prevented. A rig- 
orous enforcement of internal taxation in such a country as the 
United States is impossible. The character of our institutions, and 
the habits of the people, require great freedom of action for every 
one ; the restraints imposed must be few, and the perquisitions of 
the tax-gatherer slight. The police and other agents of the admin- 
istration must not be too compactly organized and drilled, or too 
rigid in their demands ; they must not carry their watchfulness too 
far. The legitimate consequence of the theory that the people 
govern themselves is, that in many respects they are but imper- 
fectly governed. The inconveniences which result from this state 
of things ought not to be complained of; they are the price of 
democratic government. A loose and defective mode of collecting 
the revenue is inevitable. During the first four years after the 
war, for every dollar which the government collected from the ex- 
cise on tobacco and distilled spirits, the consumers probably paid 
three dollars. 



CHAPTER XIX. 

EFFECTS OF SPECULATION ON PRICES : THE PHENOMENA OF A COM- 
MERCIAL CRISIS. 

The Price of a thing may be defined to be its present market 
value, or temporary exchangeable power reckoned in money. Its 
permanent or natural ExchangeaMe Value, as we have already 
seen, depends on the Cost of its Production, and is the pivot about 
which the Price, or immediate market value, is perpetually oscil- 
lating, never departing from it far, or for any long time, in either 
direction. If the Price falls below the Cost, a smaller quantity of 
the article will be produced, and therefore, the Demand continuing 
the same, the Price will soon begin to rise. If the Price consid- 
erably exceeds the Cost, production will be stimulated, more of 



A COMMERCIAL CRISIS. 461. 

the article will soon appear in the market, and then the Price "will 
fall again. 

The general principle is, that the Price so adjusts itself that 
the Demand shall be equal to the Supply. If the Supply be too 
great for the present Demand, — if the market be overstocked 
with the article, — a fall of Price must ensue ; and this diminished 
Price will bring the commodity within the means of a larger num- 
ber of consumers ; that is, the Demand for it will be increased 
enough to take off the quantity which wag a drug in the market 
at the higher Price. On the other hand, if the Demand should 
exceed the Supply, the Price will rise, and fewer people will then 
be able to purchase ; that is, the Demand will be cut down to the 
level of the Supply. 

If, for instance, flour should be ten dollars a barrel, it is 
beyond the means of a large class in the community, who will 
then be obliged to live on com-meal and potatoes. We will 
suppose that only 600,000 barrels of flour can be sold at this 
Price, since this quantity will satisfy the wants of all who are 
able to pay ten dollars a barrel. But if the Price should faU to 
five dollars, the poorer class can purchase flour, and a million of 
barrels may consequently be disposed of. But if only 500,000 
barrels should be brought to market, the competition of the 
buyers with each other will cause the Price to rise (say) fi-om ten 
to twelve dollars. This enhancement of Price will so lessen the 
number who are able to buy, that now only half a million of 
barrels will be needed. Thus the fluctuations of Price are the 
means through which the Demand is always made just equal t6 
the Supply. 

We have already explained that the Demand consists of two 
elements, the disposition to purchase and the ability to purchase ; 
and these two must coexist in order to constitute an effectual 
Demand, and thereby affect the Price. In like manner, it is only 
" the Supply " in a narrow and restricted sense, which will have 
the influence here explained. Not all the commodity which is in 
being, not all even of that portion of it which is intended sooner 
or later to be sold, constitutes what is properly termed the Supply. 
The word is restricted to that portion of the article which is 
already in the market, or is noio offered for sale. The quantity 
held in store by speciJators, awaiting an expected rise of Price, 



462 EFFECT OF SPECULATION ON PRICES: 

has no more eflPect on the present market, than the portion which 
is already sold and is held in store only for consumption, — as 
when the government has purchased sufficient stores for the army 
six months in advance. 

And even in reference to what is now offered for sale, it should 
be observed that the Price does not vary in the same ratio with the 
deficiency or excess of Supply. This depends upon the nature of 
the commodity, or rather upon the nature of the desire to possess 
it, — whether it be a natural and imperative want, or only an 
artificial one. If the article be a mere luxury, or desired only for 
the gratification of taste, a deficiency of one third in the amount 
offered for sale will not make the Price one third larger; rather 
than purchase it at a cost so much enhanced, many persons will 
do without it altogether. If the annual Supply of diamonds from 
the mines were reduced one half, it is not probable that the Price 
of them would be doubled, or even that it would be materially in- 
creased; as they are of little use except for purposes of display, 
persons would gratify their ostentatious feelings by purchasing 
some other commodity at a Price nearly equivalent to what they 
. formerly paid for diamonds. Large pearls, or other gems of high 
cost, would answer just as well. On the other hand, if the article 
is a necessary of life, so that people will submit to any sacrifice 
rather than resign it, and especially if it be of such a nature that 
an apprehended scarcity of it operates strongly on the fears of the 
multitude, a deficiency of one third may double, triple, or quad- 
ruple the Price. " The Price of corn in England," says Mr. Tooke, 
" has risen from one hundred to two hundred per cent, when the 
utmost computed deficiency of the crops has not been more than 
between one sixth and one third below an average, and when that 
deficiency has been relieved by foreign supplies." 

To what point, then, will the enhancement of Price in either 
case — whether of luxuries or necessaries — be carried? "To 
that point," says Mr. Mill, "whatever it be, which equalizes the 
Demand and Supply ; — to the Price which cuts off the extra third 
from the Demand, or brings forward additional sellers sufficient to 
supply it." It appears, also, that articles of high cost, and there- 
fore in comparatively limited demand, are more steady in Price; 
while those of prime necessity and in general use, such as bread- 
stuffs and fuel, are liable to sudden and violent fluctuations. 



A COMMERCIAL CRISIS. 463 

The influence of mercantile speculations on Price has been well 
explained by McCulloch. "It rarely happens," he says, "that 
either the actual Supply of any species of pi-oduce in extensive de- 
maud, or the intensity of that Demand, can be exactly measured. 
Every transaction in which produce is bought that it may be 
afterward sold, is, in fact, a speculation. The buyer anticipates 
that the Demand for the article he has purchased will be such, at 
some future period, either more or less distant," or at some other 
place, either in the same country or across sea, " that he will be 
able to dispose of it at a profit ; and the success of the speculation 
depends, it is evident, on the skill with which he has estimated 
the circumstances that will determine the future price of the com- 
modity. It follows, therefore, that in all highly commercial 
countries, where merchants are possessed of large capitals, and 
where they are left to be guided in the use of them by their own 
discretion and foresight, the prices of commodities will frequently 
be very much influenced, not merely by the actual occurrence of 
changes in the accustomed relation of the Supply and Demand, 
but hy the anticijjation of such changes. 

" It is the business of the merchant to acquaint himself with 
every circumstance afi'ecting the particular description of commod- 
ities in which he deals. He endeavors to obtain, by means of an 
extensive correspondence, the earliest and most authentic informa- 
tion with respect to evei'ything that may affect their Supply or 
Demand, or the Cost of their Production; and if he learned that 
the Supply of an article had failed, or that, owing to changes of 
fashion or to the opening of new channels of commerce, the De- 
mand for it had been increased, he would most likely be disposed 
to become a buyer, in anticipation of profiting by the rise of Price, 
which, under the circumstances, could hardly fail of taking place ; 
or if he were a holder of the article, he would refuse to part with 
it unless for a higher Price than he would previously have accepted. 
If the intelligence received by the merchant were of a contrary 
description, — if, for example, he learned that the article was now 
produced with greater facility, or that there was a falling off" in 
the Demand for it, caused by a change of fashion, or by the shutting 
up of some of the markets to which it had previously been ad- 
mitted, — he would act differently ; in this case, he would antici- 
pate a fall of prices, and would either decline purchasing the article 



464 EFFECT OF SPECULATION ON PEICES : 

except at a reduced rate, or endeavor to get rid of it, supposing 
him to be a holder, by offering it at a lower Price. In consequence 
of these operations, the prices of commodities, in different places 
and periods, are brought comparatively near to equality. All 
abrupt transitions, from scarcity to abundance, and from abundance 
to scarcity, are avoided ; an excess in one case is made to balance 
a deficiency in another, and the Supply is distributed with a degree 
of steadiness and regularity that could hardly have been deemed 
attainable." 

All commerce, then, may be said to consist in speculation, if 
we leave out of view those operations which are more properly 
regarded as subsidiary to commerce than as forming a part of it ; 
such as the actual transportation of commodities from one place to 
another, and breaking bulk, or selling by retail for the greater 
convenience of consumers. The rest is only buying or selling 
with a view to profit from an expected change of Price ; and the 
success of the dealer will depend upon the correctness of his antici- 
pations. Speculation, then, as McCulloch remarks, " is only another 
name for foresight." It plays an important part in those benefi- 
cent arrangements of Providence through which the cupidity and 
selfishness of individuals are made to minister to the general good. 
To recur to an instance already cited, it is through the specula- 
tions of private merchants that the inhabitants of a great metropo- 
lis are supplied with food and all other necessaries of life, without 
wastefulness, and yet without stint, each family receiving every 
day just what it wants, and as much as it wants, and being 
admonished, through the Price, to limit or economize its consump- 
tion of any one article, whenever a failure in the harvest or other 
mode of supply, or even the prospect of a failure, renders such 
economy essential. 

The common prejudice against speculation arises, first, from 
confounding it with gambling, to which we must admit that it 
is very nearly allied, as the two operations run into one another 
by imperceptible degrees. A stock-jobber, for instance, agrees to 
purchase, at a future day, a particular amount of government stock 
at a certain price, expecting that the market price will rise before 
the day comes, so that he will make a profit by the bargain ; the 
jobber who contracts to sell him the stock at that time, and on 
those terms, expects that the market price will fall in the mean 



A COMMERCIAL CEISIS. 465 

time. But the party who agrees to sell has really no stock to 
dispose of, and he who agrees to purchase does not expect to 
receive the stock, but only to receive or pay, on the day ap- 
pointed, the difference between the actual market price and the 
price agreed upon. Obviously, this is only betting upon the rise 
or fall of stocks within a given period, and is therefore properly 
denounced as "gambling in the stocks." On the other hand, a 
flour-merchant agrees to purchase, at a fixed price, a cargo of 
flour which has not yet an'ived in port, because he has been led 
to believe that the price will rise, while the person who sells it 
to him expects it will fall ; and this is admitted to be fair specu- 
lation, or a legitimate operation of trade. 

Speculation can be accurately distinguished from gambling, as 
it seems to me, only by taking into account the difi*erent motives 
and intentions of the parties. The gambler, acting from the love 
of excitement almost as much as from the thirst for gain, makes 
bets, or forms contracts which amount to bets, with reference to 
the doctrine of chances only, having no regard to the effect which 
his transaction will have upon markets by equalizing prices and 
supplies. The upright merchant, excluding as far as possible all 
consideration of mere chance, forms no bargain if his calculations 
do not assure him that it must lead to a favorable result ; his 
transactions are all real, or based upon the actual transfer of 
merchandise, with reference to the effect of such transfer upon the 
markets in removing a surplus from one time or place, and sup- 
plying a deficiency in another. Accidents that could not be fore- 
seen may falsify his calculations, and bring failure and loss; 
but he engages in no enterprise that bears hazard upon its face, 
regarding this as the province of the gambler. Failure, therefore, 
always takes him by surprise ; and he shuns danger, while the 
other courts it, or deliberately weighs the probability of loss 
against that of gain. 

Another prejudice against legitimate speculation in trade has 
arisen from its supposed effects in creating an unnecessary enhance- 
ment of Price, to the detriment of the consimiers. This is a 
mistake ; the speculator cannot raise prices unnecessarily, without 
injuring himself more than those who buy of him. Take, for 
instance, the strongest case, — the grain and flour trade. It is 
for the interest of the community that each crop should be dis- 
30 



466 EFFECT OF SPECULATION ON PKICES : 

tributed equally throughout the country, and throughout the 
year. The business of the grain-merchant is to equalize the sup- 
plies, and the more equal and perfect he makes this distribution, 
the larger is his profit. His interest, then, even in years of the 
greatest scarcity, is exactly coincident with that of the consumers. 
If the deficiency be very great, he sends to foreign countries for 
an additional supply, and thus contributes effectually to lower 
the price. If the harvest, on the other hand, has been iinusually 
abundant, he exports a portion of the surplus, and thus prevents 
injury and discouragement to the agriculturists from the price 
falling too low, and guards the people against the formation of 
wasteful and improvident habits in consuming a cheap commodity. 
True, if he has a large stock on hand when the scarcity begins to 
be felt, he makes immense profits from the rise in price ; and he 
sometimes holds back his stock in expectation of a further rise, 
though meanwhile the poorer classes are actually suffering from 
hunger. But in so doing, as Adam Smith remarks, he only treats 
the people in the same manner as the prudent master of a vessel 
often treats his crew. " When he foresees that provisions are 
likely to run short, he puts them upon short allowance. Though, 
from excess of caution, he should sometimes do this without any 
real necessity, yet all the inconveniences which his crew can 
thereby suffer are inconsiderable, in comparison of the danger, 
misery, and ruin to which they might sometimes be exposed by 
a less provident conduct. If he raises the price unnecessarily 
high, he becomes himself the greatest sufferer, as he runs the 
risk of losing a portion of his stock, by the natural decay of so 
perishable a material, and of being obliged to sell what remains of 
it at a much lower price than he might have obtained some 
months before. The profit which he makes when the price 
unexpectedly rises, from a failure of the crops, is only a fair com- 
pensation for the loss which he must suffer when the price 
unexpectedly falls. The average rate of profit cannot be higher 
in this trade than in any other, as the business is free to all, 
and as competition brings profits everywhere to a level." 

It is not denied that prices are sometimes raised or lowered 
unnecessarily by the operations of speculators. Merchants, as 
well as other persons, are sometimes mistaken in their calcula- 
tions. But the mistakes thus committed soon correct themselves j 



A COMMERCIAL CRISIS. 467 

they are usually of small extent and short duration, and they 
injvire none so much as those who make them. When the error 
is discovered, the market experiences a revulsion, and prices for 
a time are depressed as much below their proper level as they 
were formerly, without due cause, elevated above it, so that the 
average result to the consumers is the same as if no disturbance 
had happened. When war was expected between England and 
China, in 1839, it was believed that the supply of tea would be 
almost entirely ^ut off; the whole supply in the market was 
therefore eagerly bought up by dealers and speculators, and 
prices advanced 100 per cent and upwards. But in less than 
three mouths, it was ascertained that the supply, by means of 
indirect shipments, cargoes being transshipped from American and 
Dutch to English vessels, would probably be as large as ever, 
while the consumption had been much diminished by the high 
price. There was, consequently, a violent reaction in the market, 
consumers obtained their tea cheaper than ever, and most of the 
speculators became bankrupts ; they had injured nobody but them- 
selves. 

But apart from those mistakes of speculators which affect the 
price of only one or two ai-ticles, experience tells us that far more 
general errors are sometimes committed. A fever of speculation 
appears at times to seize upon the whole mercantile community, 
producing for a while an unnatural inflation of the prices of nearly 
all commodities, and then, with a sudden reaction, carrying them 
back to a point much below their former average, thus caiising 
general distress, loss of confidence, and bankruptcy. These violent 
changes, from a period of great activity and seeming prosperity of 
trade to one of marked depression of prices and general inability 
to meet pecuniary engagements, are called Commercial Crises, and 
are among the most striking phenomena in the history of com- 
merce. The state of trade, says Lord Overstone, " revolves appar- 
ently in an established cycle. First we find it in a state of quies- 
cence, — next, improvement, — growing confidence, — prosperity, 
— excitement, — over-trading, — convulsion, — pressure, — stagna- 
tion, — distress, — ending again in quiescence." Experience does 
not seem to teach caution, or instruct merchants and speculators 
how to avoid a recurrence of the evil. These Crises are not of 
infrequent occuiTence. Both in England and the United States, 



468 EFFECT OF SPECULATION ON PKICES : 

they come round, on an average, about once in ten years. There was 
one in 1825, others in 1836, in 1847, in 1857, and in 1866. In 
the United States, the violent Crises of 1837 and 1857 compelled 
all the banks in the country to suspend specie payments. 

When it is expected that circumstances will cause some com- 
modity to rise in price, dealers in it enlarge their purchases, in 
order to profit by the alteration ; and these additional purchases 
tend to raise the price still higher. Other speculators are then at- 
tracted into the business, and their operations cause a further ad- 
vance. The price thus obtains an unnatural elevation, much 
above what would have been produced by the circumstances which 
first tended to raise it ; and those who have accumulated a large 
stock of the commodity now become anxious to sell. This is the 
turning of the tide ; the price ceases to advance, and even begins 
to decline. The holders rush into the market to avoid further loss, 
and their eagerness to sell carries down the price more rapidly 
than it rose. 

The lessons of experience are of little use under such circum- 
stances; for though it be generally perceived that the rise is 
merely speculative, and the reaction be foreseen, each dealer still 
wishes to hold back till the advance has reached its maximum, 
and to sell only when the decline is about to begin. A few succeed 
in choosing the right moment for disposing of their stock ; but the 
sanguine wait for the tide to rise still higher, and are caught by 
the suddenness of the revulsion. A concurrence of circumstances 
may affect the price of several commodities at once ; and then, 
partly from sympathy, partly from the excitement produced by 
seeing great fortunes quickly accumulated by the few who made 
large purchases at the right moment, the rise becomes general, 
and a fever for buying and selling almost any article appears to 
pervade the whole community. Many of those who now appear 
as buyers are not merchants, but persons engaged in other biisi- 
ness, or living perhaps on fixed incomes, who speculate in the hope 
of suddenly increasing their fortune. " In speculation, as in most 
other things," says McCuUoch, " one individual derives confidence 
from another. Such a one purchases or sells, not because he has 
any peculiar or accurate information in regard to the state of the 
Demand and Supply, but because some one else has done so before 
him." This interference of persons not experienced in business 



A COMMERCIAL CRISIS. 469 

tends, of course, to fan the excitement, and, when the recoil comes, 
to render the catastrophe more general and moi-e ruinous. 

Two theories prevail respecting the nature and causes of a Com- 
mercial Crisis. The first attributes nearly the whole evil to an 
unnecessary expansion of the currency, caused by the mismanage- 
ment of the banks, and undertakes to find a remedy by placing 
heav}' restrictions upon the issue of bank-notes. The other regards 
the banks as necessarily passive in the matter, as they have noth- 
ing to do with buying or selling commodities, and finds the char- 
acteristic feature of the phenomenon in a great extension of the 
system of credit, which cannot be prevented by legislation, and 
which might take place, and, in fact, often has taken place, in 
countries where only a metallic currency was in xise. The one 
party maintains, that an expansion of the currency always precedes 
a Commercial Crisis, and that it is this expansion which produces 
the rise of prices ; the other affirms, that it is the rise of prices 
which produces what there is of an expansion, but that this in- 
crease of the currency, at the most, is inconsiderable ; — that it is 
one of the attendant circumstances, or consequences, of the Cx'isis, 
but is not its cause. Their doctrine is, that prices rise first, and 
that there is a slight increase of the circulation some time after- 
wards. 

I have already endeavored at some length to prove, that a co7i' 
vertible paper currency cannot be issued in excess ; that the whole 
amount of money needed by the country is a fixed quantity, and 
it is not in the power of the banks, however disposed they may be 
to do so, to make any direct addition to the aggregate of circulating 
notes. The doctrine which attributes all the evils of excessive 
speculation to the excessive issues of the banks may be summed 
up in the oft-repeated, but mistaken, assertion, that "it is only 
the money in circulation that affects prices." Now it is certain 
and obvious, that the power of making extravagant purchases, 
and thereby enhancing prices and contributing to bring about a 
Commercial Crisis, does not at all depend upon the quantity of 
money, whether coin or bank-notes, that is in circulation. It 
might be exercised, as I have already shown, to any extent, 
though the cm-rency were exclusively metallic, and even though 
there were no currency, so that all debts should be contracted, 
and all payments made, in kind, or by the delivery of specified 



470 EFFECT OF SPECULATION ON PEICES : 

amounts of particular merchandise. An individual may purchase 
by giving in exchange either his own notes, or bank-notes ; that 
is, he may buy with his own promises to pay, or with the bank's 
promises to pay. The former promises may be issued in great 
excess ; there is, in fact, no limit to their amount. The latter 
cannot be issued in excess. There is a check — an instantaneous 
and decisive check — on the issue of bank-notes ; specie or actual 
value may be demanded for them at any time at the bank 
counter ; and such a demand is a certain consequence even of a 
slight excess in the issue. There is no check on the excessive 
issue of the notes of any private person, because they are given 
on time, — for six months, a year, or more. Specie cannot in- 
stantly be demanded for them. 

Over-trading, or excessive speculation, arises from an abuse of 
the purchasing power, which every man possesses in a greater or 
less degree. " The amount of purchasing power which a person 
can exercise," says Mr. Mill, "is composed of all the money in 
his possession, or due to him, and of all his credit. He is tempted 
to exercise the whole of this power only under peculiar circum- 
stances; but he always possesses it; and the portion of it at 
any time which he does exercise is the measm-e of the effect which 
he produces on prices." In fine, credit as much exceeds currency 
in its influence on prices, as the number of purchases on credit 
exceeds the number of purchases for cash ; and in the dealings 
of merchants with each other, every one knows that this ratio 
is at least as one hundred to one. Under ordinary circumstances, 
most traders find no difficulty in extending their credit, so far as 
the purchase of goods is concerned, to any extent that they may 
think desirable. They may not be able to borrow or hire capital 
directly, but they can purchase merchandise on credit, as it is 
termed, with no other check than their own judgment of what is 
honest and safe. Thus, when the difficulties with China, in 
1839, produced a speculation in tea, one dealer was known, 
"who, having a capital not exceeding £1,200, which was locked 
up in his business, had contrived to buy 4,000 chests, value above 
£80,000 " ; and this was done without the outlay of actual capital 
or currency in any shape. 

But to this doctrine, that credit may be indefinitely extended 
without any expansion of the currency, it may be objected, 



A COMMERCIAL CRISIS. 471 

that credit is necessarily limited by the amount of disposable 
capital in the country ; for no more capital can be borrowed than 
there is capital to lend. Exactly so ; but then the instances 
given are, nominally, not loans, but purchases ; and consequently, 
the limit to them is, not the amount of capital which is seek- 
ing a borrower, only interest being expended for it, but the 
amount of merchandise which is seeking a purchaser, and on 
which profits are expected. To buy on credit is only to bor- 
row on the hard condition of paying for the sum boiTowed, 
not merely the rate of interest, which is but six per cent, but 
the rate of profit, which equals at least ten or twelve per cent. 
Hence, a merchant, who would immediately refuse to lend a 
brother merchant $5,000 on interest for six months, will very 
readily sell him $50,000 worth of goods on six months' credit. 
Thus there is literally no limit to the expansion of credit; 
the whole amount of merchandise oftered for sale, both in this 
country and in foreign lands, may be sold on credit, under 
the temptation of the high prices, and consequent expectations 
of large profits, which are caused by a speculating fever ; and 
having been sold once in this manner, the purchasers may then 
sell them again to another set of speculators ; and again, till their 
value is indefinitely multiplied. What a mountain of indebted- 
ness may thus be created, without the intervention (at least, till 
some months have elapsed) of one dollar of currency, or even any 
demand upon the banks for additional loans ! Large importations 
are only one mode of obtaining credit, or " borrowing money," as 
it is termed ; and Commercial Crises are oftener produced by 
them than by any other means. 

It is not the want of money which occasions distress and bank- 
ruptcy in a Commercial Crisis ; for the returns show that the 
amount of the circulation is usually increased at such periods, 
though the difterence, whether of excess or defect, is too slight to 
have any perceptible effect upon the markets. But the real cause 
of the distress is the insufficiency of the duposahle capital in the 
market to meet the sudden increase in the demand for loans, 
which is occasioned when the time arrives for paying off the ex- 
cessive purchases on credit that have been made during the fever 
of a general speculation. The notes of hand and bills of exchange, 
which were so freely and thoughtlessly given when prices were 



472 EFFECT OF SPECULATION ON PRICES: 

advancing, and when it was expected that they would advance 
still higher, must come to maturity, usually in six months or 
less ; and then come the pressure and the panic. As it was the 
unusual amount of these private " promises to pay," and the ex- 
travagance of the piirchases in which they originated, that first 
produced the enhancement of prices, so now the demanded ful- 
filment of them causes prices to recede, makes speculators eager 
to sell, and multiplies the apph cations to banks and usurers for 
loans. 

There is always a certain amount of Floating Capital in the 
market, seeking investment in loans. It is accumulated chiefly 
by savings from income, which are made by persons who are un- 
willing or unable to manage their capital for themselves by en- 
gaging in industrial enterprises, and therefore seek to lend it to 
others. A considerable portion of this floating fund is accumulated 
in the banks, making up both their capitals and deposits, and thus 
constituting far the larger part of what they are able to lend to 
their customers. Hence it is, that what are called the " loans and 
discounts " of the banks so largely exceed the amount of their cir- 
culation. 

The other portion of Floating Capital, which is in the market 
seeking borrowers at varying rates of interest, but does not get 
into the banks, or is only lodged there temporarily on deposit, is 
much more fluctuating in amount, and is the real agent or subject 
of that " expansion " and " contraction " which are so much com- 
plained of. During the period of quiescence which follows a Com- 
mercial Crisis, people go on quietly making savings from income, 
and, having learned from recent woful experience the folly of new 
speculations and hazardous investments, they prefer not to engage 
in any enterprise on their own account, but only to lend their sur- 
plus funds on good mortgages or first-rate personal security, and, 
in this last case, only for short periods. But as almost everybody, 
at such a time, is afraid of speculation, new enterprises are not 
started, trade is quiet, and there is not, consequently, much de- 
mand for loans, and that little demand is fully supplied by the 
banks from their regular funds. Lenders then compete with each 
other, and strive to tempt merchants and manufacturers to borrow, 
by offering the use of capital at low rates of interest. Even the 
banks, under such circumstances, are sometimes compelled to re- 



A COMMERCIAL CKISIS. 473 

duce their rates of discount, in order to find borrowers and keep 
their capital employed. 

Piu-chases of stocks which have been for some time in the mar- 
ket, whether in national or State loans, banks, manufactories, or 
railroads, have no effect in diminishing the amount of disposable 
capital in the loan-market, but only transfer the ownership of por- 
tions of it to other individuals. If A, who seeks to invest $50,000, 
cannot find a borrower who will take it on good security and pay 
him a satisfactory rate of interest for it, and finally decides to buy 
Reading Railroad bonds, or New York State stocks, he only trans- 
fers his $50,000 to B, who sells him these bonds or stocks, and 
who will now come into the loan-market to find a bon-ower for the 
funds which he has received. The supply of Floating Capital, 
then, will be just the same as before. If, however, a State, a city, 
or a railroad comes forward to contract a neio loan, and thus issues 
an additional amount of stocks or bonds, the capital which it re- 
ceives is permanently taken out of the loan-market, and expended, 
perhaps in constructing water-works, new roads, or other internal 
improvements. 

I have ah-eady explained the phenomena of the gradual declen- 
sion of the rate of profit, which takes place in every country as it 
advances in opulence, and gradually extends its enterprise over the 
whole field for the profitable employment of Fixed Capital. This 
declension is soon manifested in the loan-market, steadily operating 
against the rate of interest, and causing it, though with many 
fluctuations, to move slowly downwards. The savings from in- 
come, which, at first, for the most part, were invested as soon as 
made, either in constructing roads, docks, and canals, or in fur- 
nishing manufactories with costly machinery, are finally driven 
more and more into the market as Floating Capital, seeking borrow- 
ers : because it is found that the work of Fixed Capital is so nearly 
completed, that no farther application can be made of it except at 
great hazard, or with the prospect of very small dividends. After 
the loan-market becomes gorged, however, and the losses expe- 
rienced in former speculations are gradually forgotten, the low 
rates of interest, and the facility of obtaining loans, again allure the 
multitude into hazardous enterprises. New schemes are brought 
forward, and old ones resuscitated. Docks, copper-mines, new 
railroads, laying out new cities, driving tunnels through mountains 



474 EFFECT OF SPECULATION ON PEICES : 

and under rivers, and many similar undertakings, are proposed as 
excellent means of investing capital and obtaining large returns. 
Merchants catch the infection, and make large importations of 
goods. The scale of expenditure is enlarged, as people are tempted 
to spend in proportion to their expected gains ; and thus prices 
begin to rise. The merits of every new scheme are so loudly 
trumpeted that those who first invested in them are enabled to 
sell out their shares at a high profit. The plethory of the loan- 
market is so far relieved that the rates of interest rise, and the 
cautious and prudent capitalists are as much delighted as the dar- 
ing speculators. 

After a time, the period of payment arrives. The notes, which 
have been given for heavy purchases on credit, come to maturity, 
and anxious borrowers find to their dismay that the tide in the 
market has turned, and there is now very little Floating Capital to 
be had, and that only at high rates. There is an immense increase 
in the demand for loans, and a great diminution of the supply, as 
many capitalists have caught the infection, and preferred to specu- 
late with their funds, rather than to lend them on interest. The 
banks, indeed, continue to lend as usual, as their capital exists for 
no other purpose ; but their means are strictly limited, and they 
can only supply the ordinary amount of accommodation to their 
customers, whose wants are sadly increased. They are besieged 
with applications which they cannot grant, and are then blamed 
for having first contributed to heighten the excitement, by offering 
loans at low rates some months before, and now refusing to lend 
except in small sums and on harder terms. The charge is wholly 
unjust ; for by furnishing a steady supply to the loan-market, not 
enlarged in a period of speculation, nor diminished in a time of 
pressure, their operation is like that of the balance-wheel in a 
machine, tending to deaden the shock of transition, and to moder- 
ate both extremes. The difficulties which the speculators labor 
under compel them to make forced sales of their shares, or of the 
merchandise which they have bought at inordinate prices ; and 
this eagerness to sell creates suspicion, and soon leads to an ex- 
posure of the rottenness of many of the schemes in -which they 
have engaged. These fictitious values are destroyed, and their 
fancied wealth disappears like a dream. Public confidence being 
thus shaken, a general desire to realize property, as it is termed, 



A COMMERCIAL CRISIS. 475 

or to convert mere evidences of debt into coin or other actual 
possessions, ensues ; and then follow many failures, and general 
agitation and distress. 

It must not be supposed that reckless speculation is the only 
cause of disturbance in the loan-market, rendering the supply for a 
while inadequate to the demand. Physical or political causes, a 
failure of the crops, the breaking out of a war, or the return of 
peace, may create a sudden demand for capital to be sent abroad, 
which will so far lessen the quantity usually offered to borrowers 
as to occasion them serious inconvenience, and even to create a 
panic. " The Crisis of 1847," says Mr. Mill, " belonged to another 
class of mercantile phenomena. There occasionally happens a con- 
ciu-rence of cu-cumstances tending to withdraw from the loan-mar- 
ket a considerable portion of the capital which usually supplies it. 
These circumstances, in the present case, were great foreign pay- 
ments, (occasioned by the high price of cotton and the unprece- 
dented importation of food,) together with the continual demands 
on the Circulating Capital of the country by railway calls and the 
loan transactions of railway companies, for the purpose of being 
converted into Fixed Capital and made unavailable for future 
lending. This combination of a fresh demand for loans with a 
curtailment of the capital disposable for them raised the rate of 
interest, and made it impossible to borrow except on the very best 
security. Some firms, therefore, which, by an improvident and 
unmercantile mode of conducting business, had allowed their capi- 
tal to become either temporarily or permanently unavailable, be- 
came unable to command that perpetual renewal of credit which 
had previously enabled them to struggle on. These finns stopped 
payment ; their failure involved, more or less deeply, many other 
firms which had trusted them ; and, as usual in such cases, the 
general distrust, commonly called a panic, began to set in." 

It has been shown, in the chapter on Banks and Bank Cur- 
rency, that there are two sorts of customers of the Banks, the 
Creditor class and the Debtor class; and that the transactions 
between them are adjusted almost entirely by the movement of 
the Deposits, wholly irrespective of the Bank Circulation properly 
so called. Strange as it may seem, the jDressure of a severe Crisis 
serves rather to augment, than to diminish, the aggregate of 
Bank Deposits. Many persons of moderate means, who can 



476 EFFECT OF SPECULATION ON PRICES: 

afford in ordinary times to keep a small sum in bank-bills in 
their own possession, are now compelled to part with them, in 
order to pay their debts or to purchase necessaries. The bank- 
bills thus pass into the hands of traders, who immediately pay 
them into the banks, and thereby increase the Deposits and 
somewhat diminish the active Circulation. Even if these traders 
have notes of their own to pay on the same day on which they 
receive the bills, they often prefer to lodge the bills in Bank in 
order to increase their deposit, and then pay their note with a 
check, which transfers this deposit to the credit account of their 
creditor. 

We come now to the question, whether it is possible to make 
any such use of the Deposits as will alleviate the pressure of a 
panic, or what is usually called a Commercial Crisis. To alleviate 
the Crisis, we say ; not to avert it, for that is impossible. Trade 
cannot exist without speculation, for all trade is speculation; 
and speculation cannot fail to become excessive, when credit is 
very easily granted, as it always must be in the period after one 
panic, when the Creditor class find that they have large Deposits 
lying idle, and when they consequently become eager to lend 
them, in order to obtain interest for their accumulations. As 
they were desirous, during the Crisis, to change their investments 
from prospective private debts to immediate bank debt, so now, 
after the Crisis, they are eager to obtain good private notes, 
payable on interest at a future day, instead of their unproductive 
Deposits. But when abundant credit is offered on easy terms, 
and prices are unusually low, as another consequence of the recent 
pressure, merchants will make large purchases, in the hope of 
profiting by a speedy rise of prices ; and in this hope they are 
not disappointed, as these very purchases cause the expected rise. 
Others are thus incited to follow their example, and, speculation 
again becoming excessive, a panic ensues, and the former pressure 
in the money-market is renewed. 

But the fact has not been sufficiently noticed, that the Creditor 
class of depositors are as much affected by this panic as the 
Debtors, and that their injudicious proceedings, when thus affected, 
greatly enhance the very evil which they dread. As the bill- 
holders, by making a run npon a bank whose credit is shaken, 
make the suspension inevitable which might otherwise be averted, 



A COMMERCIAL CRISIS. 477 

SO the Creditor depositors, by allowing the notes due to them 
to matui'e without making further loans, cause many to become 
insolvent whose assets, under ordinary circumstances, would pay 
all their liabilities and leave a surplus. Mercantile debts are 
paid, as we have seen, only by a free circulation of the Deposits. 
But when the Creditor class refuse to make further loans, these 
Deposits accumulate in sluggish masses to their own credit, 
being seldom transferred on the bank books to the credit of the 
Debtor class, and every failure thus caused only enhances the 
difficulty. Because A cannot obtain a loan, he is unable to pay 
a debt to B, who is therefore also driven into insolvency ; and 
his failure, by diminishing the receipts of C and D, obliges them 
also to fail. It is not unlikely that C and D may be largely 
indebted to the very same capitalist, or " creditor depositor," 
whose eagerness to change his funds from prospective private 
debt to immediate bank debt — or, in other woi'ds, to enlarge the 
amount of Deposits to his own credit — made him refuse the 
required loan to A, which might have saved him from failure, and 
thereby averted the failure of B, C, and D. Thus the capitalist, 
by refusing to make one loan on what he considers as doubtful 
security, may cause himself to lose twice as much through the 
subsequent failures which are thus necessitated- He can foresee 
this result, and act accordingly, if the chain of connection be only 
a short one. If, for instance, by lending $10,000 to A, he can 
see that it will enable A to pay B a note for $15,000, and 
thereby B will be enabled to pay $ 20,000 to himself, a regard 
for his own interest will induce him to make the loan, though on 
what he would otherwise regard as insufficient security. What 
are called "forced renewals" of a note are sufficiently common, 
and are of precisely this character. But if the chain of connec- 
tion be a long one, extending through many persons, being un- 
able to follow it, he is fearful lest, by making this doubtful loan, 
he will only enable B, C, D, E, etc. to pay their notes to other 
capitalists, so that all the benefit will accrue to them, and the 
only loss will be his own. 

Yet nothing can be plainer than that, if he and all other cred- 
itor capitalists were willing to incur this hazard, — acting, in truth, 
on the principles of a mutual insurance company, — if they would 
lend, during a pressure in the money-market, to the same amount, 



478 EFFECT OF SPECULATION ON PRICES: 

and on the same security, which would satisfy them in prosperous 
times, — then all unnecessary failures would be averted, and both 
the Debtor and Creditor classes would be equally benefited. 
Suppose, for instance, there were only three creditor capitalists, 
X, Y, and Z, and only six debtors, whom we will designate by 
the first six letters of the alphabet. If X would lend to A and 
B, and thereby enable them to pay Y and Z ; if Y would lend to 
C and D, and thereby enable them to pay X and Z ; and if Z 
would lend to E and F, and thereby enable them to pay X and 
Y, — the pressm-e and the panic would be greatly alleviated ; for 
no failures could occur except of persons who could not offer 
reasonable security for loans, — that is, whose debts really ex- 
ceeded their assets. And these ought to fail ; a moderate pressure 
in the money-market, by winnowing such insolvents out of the 
trading community, would be a benefit, rather than an injury, to 
the whole number. 

It is evident, from this analysis, that an association of all, or 
a greater part, of the creditor capitalists might do with perfect 
impunity what no one of them could accomplish without great 
hazard and loss. They might so far diminish the pressure and 
panic, that not a single merchant would be driven into insolvency 
by it, except his undoubted means were really smaller than his 
liabilities. All their deposits in the various banks being thrown 
into a common fund to the credit of this association, loans from 
this fund might be made, at the common risk, to any extent what- 
ever ; for any loan out of the fund would immediately occasion a 
corresponding payment into it of the same amount. The fund 
would thus be inexhaustible ; for if managed with common pru- 
dence, — that is, if no loans were made except on fair security, or 
with reasonable prospect of repayment, — the profit or interest on 
the loans would suffice to pay all expenses, and still leave a 
reserve, or guaranty fund, which would offset the few bad debts 
that might be contracted. 

Such an association might be called a Great Bank ; but it 
would be one of a peculiar kind. It would be a bank performing 
the same function for the existing banks that these banks now 
perform for individuals, — that is, it would be, to use a mathe- 
matical expression, a bank raised to the second power, — Bank*^. 
The Bank of England, to some extent, is such an institution, as 



A COMMERCIAL CRISIS. 479 

it stands in precisely this relation to all the Private banks and 
the Joint-Stock banks in the city of Loudon, all of which have 
Deposits in the Bank of England, which is thus enabled to make 
farther loans on the strength of these Deposits, without depriving 
the depositing banks of the full use of their funds. Our pro- 
posed Bank, or Association of depositors, however, would be pecu- 
liar in another respect, in that it would require neither charter 
nor capital, would issue no bills, and would perform no function 
but that of making loans and circulating Deposits. It would not 
withdraw any funds or Deposits from the present banks, but 
would circulate and equalize these Deposits, keeping the share of 
each bank as strictly proportioned as it now is to its amount 
of business. Its functions would be very similar to those of the 
Clearing-House. and might perhaps be profitably added to the 
present operations of the Clearing-House, being conducted under 
the oversight of the same committee, or of one chosen by the 
associated depositors. 

It appears from this explanation, that there is no good reason 
why merchants of undoubted solvency should find it any more 
difficult to pay their notes at one time than another. The 
fund which affords the means of paying them — i. e. the total 
amount of the Deposits — remains without material fluctuation 
throughout all conditions of the money-market ; or rather, as 
we have seen, it is a little increased in a time of pressure. 
And the aggregate of this fund is not diminished by making 
payments out of it to any amount whatever; for though all 
commercial debts are paid out of it, they are by the same act paid 
into it, the operation of payment only shifting the names of the 
persons to whose credit a given portion of the fund is entered. 
But so long as the fund is owned and held (say) by a thousand 
different depositors, any one owner fears to lend during a crisis, 
lest the loan should diminish his share of the deposits, though it 
would thereby certainly increase the share of some other owner. 
But throw all the Deposits into one fund, intrusted to the man- 
agement of one person or one institution, and, while each de- 
positor may still retain the entire use and direction of his own 
deposits, the manager of the whole may make loans to any extent 
without subtracting a dollar from the aggregate. To obtain a 
loan, and therewith to pay a debt, is not to take away anything 



480 INTEENATIONAL EXCHANGES: 

from the total amount of the Deposits, but only to shift the 
distribution of them on the books, where they are entered to the 
credit of different persons. 



CHAPTER XX. 

THE DOCTRINE OP INTERNATIONAL EXCHANGES : THE LIMITS OF FREE 
TRADE AND THE PROTECTIVE SYSTEM. 

It has now been shown that prices are determined by the re- 
lation of the Demand to the Supply, and that an extension of the 
market, or an increase of the Demand, can be obtained only by 
submitting to a fall of prices, so as to bring the article within the 
reach of a greater number of consumers. In any market, only a 
certain quantity of goods at a given Price can be consumed ; if 
more goods are forced upon the market than it naturally requires, 
the Price must faU, and then the consumption may be very much 
increased. 

It has also been proved, that we really purchase commodities 
with commodities ; that we pay for our whole imports with our 
whole exports; that if, in our traffic with any one country, our 
imports much exceed our exports, then we pay the balance, not in 
money, but by transferring to that country the debt due to us 
from another country, with which our trade is such that our 
exports exceed our imports. It is only the balance of the im- 
mensely long " account-current " of our trade with all foreign 
countries whatsoever which is struck in money; and this cash 
balance cannot be more than an insignificant fraction of either side 
of the account. 

The advocates for free trade have always insisted, that we must 
buy merchandise of England, not only to induce, but even to 
enable, England to buy merchandise of us ; that we must buy of 
any country in order to sell to her, and must buy as much as we 
sell. But it is not so. It is not necessary that we should take 
enough of English manufactured goods to pay us for all the cotton, 
tobacco, and wheat which we sell to England. England is able, 
though of course she is not very willing, to pay us the balance in 



THE PROTECTIVE SYSTEM. 481 

tea from China, coffee from Brazil, hemp from Russia, or whatever 
other article, from whatever other country, we see fit to require. 
We can compel her to pay us in whatever commodities we may 
select ; for the articles which we sell to England, cotton, tobacco, 
and wheat, are of prime necessity to her, and most of them she 
cannot obtain elsewhere. As our exports must pay for our im- 
ports, the only point to be considered is, how we can dispose of the 
exports to most advantage, or obtain for them the largest return of 
the imports. 

The cost to us of our domestic products is, the labor that is 
expended upon their production. But the cost to us oi foreign 
products is, not the labor which has been expended upon their 
production, but the labor tuhich ive must expend upon the articles that 
are given in exchange for those products. 

"The advantage of an interchange of commodities between 
nations," says Mr. Mill, " consists simply and solely in this, — 
that it enables each to obtain, with a given amount of labor and 
capital, a greater quantity of all commodities taken together. 
This it accomplishes by enabling each, with a quantity of one 
commodity which has cost it so much labor and capital, to pur- 
chase a quantity of another commodity, which, if produced at 
home, would have required labor and capital to a greater amount. 
To render the importation of an article more advantageous than 
its production, it is not necessary that the foreign country should 
be able to produce it with less labor and capital than ourselves. 
We may even have a positive advantage in its production ; but 
if we are so far favored by circumstances as to have a still greater 
positive advantage in the production of some other article which 
is in demand in the foreign countiy, we may be able to obtain a 
greater return to our labor and capital by employing none of it 
in producing the article in which our advantage is least, but de- 
voting it all to the production of that in which our advantage is 
greatest, and giving this to the foreign country in exchange for 
the other. It is not a difference in the absolute cost of production, 
which determines the interchange, but a diflFerence in the com- 
parative cost." 

The inhabitants of Barbadoes, for instance, favored by their 
tropical climate and fertile soil, can raise provisions cheaper than 
we can in the United States. And yet Barbadoes buys nearly all 

31 



482 INTERNATIONAL EXCHANGES: 

her provisions from this country. Why is this sol Because, 
though Barbadoes has the advantage over us in the ability to 
raise provisions cheaply, she has a still greater advantage over us 
in her power to produce sugar and molasses. If she has an ad- 
vantage of one quarter in raising provisions, she has an advantage 
of one half in regard to products exclusively tropical; and it is 
better for her to employ all her labor and capital in that branch 
of production in which her advantage is greatest. She can thus, 
by trading with us, obtain our breadstuflfs and meat at a smaller 
expense of labor and capital than they cost ourselves. If, for 
instance, a barrel of flour cost ten days' labor in the United States, 
and only eight days' labor in Barbadoes, the people of Barbadoes 
can still profitably buy the flour from this country, if they can 
pay for it with sugar which cost them only six days' labor ; and 
the people of this country can profitably sell them the flour, or 
buy from them the sugar, provided the sugar, if raised in the 
United States, would cost eleven days' labor. This is a striking 
example to show the benefit of foreign trade to both the countries 
which are parties to it. The United States receive sugar, which 
would have cost them eleven days' labor, by paying for it with 
flour which costs them but ten days. Barbadoes receives flour, 
which would have cost her eight days' labor, by paying for it with 
sugar which costs her but six days. If Barbadoes produced both 
commodities with greater facility, hut greater in precisely the same 
degree, there would be no motive for interchange. 

Now let us apply these principles to the trade between England 
and the United States. To simplify the matter, we will take but 
one article, flour, as representing all the commodities that America 
sells to England ; and but one article, cloth, as representing all 
the goods which England sells to America. Suppose, on account 
of the respective advantages possessed by the two countries, that 
the production of one barrel of flour in England costs as miich 
labor and capital as would suffice for the manufacture of ten yards 
of cloth ; while in America, one barrel of flom' can be produced for 
three fifths of its cost in England, — that is, for as much labor 
and capital as would, in England, manufacture only six yards 
of cloth. 

Now, if a system of Free Trade between the two countries be 
established, the two commodities will be exchanged for each other 



THE PROTECTIVE SYSTEM. 483 

at the same rate both in England and America. The price -will 
be eqiiaUzed between the two countries ; but at what point will it 
be equalized ] Shall the English price be established in America, 
or shall the American price be established in England 1 Or shall 
a price intermediate between the two be established 1 Either of 
these three suppositions is possible. The Englishman can afford 
to give teti yards, for it will cost him that amount of labor and 
capital to produce the flour in his own country, or for himself 
On the other hand, the American can afford to sell the flour for 
six yards, because this quantity of cloth, if produced in his own 
country, would cost him more than the flour. Suppose that, by 
the higgling of the market, the price in both covmtries is fixed 
at seve7i yards. The advantage of the trade is then shared be- 
tween the two countries, but it is shared unequally. America 
gains one yard on each barrel, as she now receives seven yards 
of cloth for the labor which formerly produced but six ; England 
gains three yards on each barrel, for the flour now costs her but 
seven yards a barrel, while it formerly cost her ten. We will 
suppose that, at these rates, America sells 100,000 barrels of flour 
to England, and receives in exchange, of course, 700,000 yards 
of cloth. The Demand on each side must be just sufficient to 
cairy off the Supply received on the other. So long as England 
wants only this amount of flour, and the United States only this 
quantity of cloth, the interchange will continue at this rate, giving 
three fourths of the profit to Great Britain, and only one fourth 
to this country. 

But suppose the Demand to vary in one of the two countries ; 
suppose that England, on account of the increase of her popula- 
tion, now needs 150,000 barrels of flour, which America is per- 
fectly able and willing to furnish. But England can pay for this 
larger purchase only by sending over more cloth ; the United 
States, however, by the supposition, are fully supplied with the 
700,000 yards which they received before ; they cannot buy any 
more at the old rate of seven yards for one barrel. How, then, is 
England to obtain the additional quantity of flour that she needs 1 
She has but one course to pursue ; she must offer her cloth at 
a reduced price, knowing that this reduced price will bring it 
within the reach of a larger class of consumers. Instead of seven, 
she will now offer nine yards of cloth for a barrel of flour. At this 



484 FREE TRADE OR 

price, the Americans may be willing and able to buy 1,350,000 
yards of cloth, which will furnish the 150,000 barrels of flour 
required by England ; or, if we do not need this large quantity 
of cloth, England has only to sell this quantity, at the reduced 
price, to other countries, and obtain in exchange for it tea, coffee, 
sugar, and other products, which, at this reduced price again, we 
do need. If we do not receive the benefit of the change of price 
in cloth, we shall receive it in other commodities. 

There is, indeed, one other mode by which England might ob- 
tain the additional quantity of flour required, without lowering the 
price of her cloth. Suppose that the demand of the United 
States for cloth had been kept down to 700,000 yards by a Pro- 
tective Tarifi\, the revenue from which paid the expenses of the 
government, though it somewhat enhanced the price of cloth to 
the people. Suppose, further, that the government, learning that 
England was inclined to purchase more flour of us, in order to 
favor that inclination, should determine to abolish the Tariff, and 
admit cloth duty free, or at a nominal duty. Then, indeed, the 
demand for cloth might be so far increased, that England might 
obtain her 150,000 barrels of flour by paying for it at the rate of 
seven yards to a barrel. We should, indeed, sell the increased 
quantity of breadstuffs, but should receive for it only 1,050,000, 
instead of 1,350,000, yards of cloth. By 'this act of legislation, 
also, we should be obliged to pay the expenses of the government 
by direct taxation, should have oiu- domestic manufactures ruined, 
and the profits of the agriculturists much diminished by the influx 
into their business, and the consequent competition, of the dis- 
banded workmen from the manufactories. 

America produces chiefly raw material, because she has the ad- 
vantages of a more extensive territory and a more fertile soil; 
England produces chiefly manufactured goods, because she has the 
advantages of more capital, longer experience, and cheaper labor. 
Now the doptrine of Free Trade, (which is a perfectly sound and 
just doctrine, if applied to two countries that are similarly situated 
in every respect,) if applied in this case, would teach the Americans 
to give themselves exclusively to the production of raw material, 
and the English exclusively to manufactures, on the ground that 
each could purchase of the other what it would then need, more 
profitably than it could produce that article for itself. Let us 



THE PROTECTIVE SYSTEM. 485 

Buppose that the Americans adopt this advice, and raise nothing 
but raw material. What will be the consequence 1 

As every civilized nation must consume more value vested in 
manufactured goods than in raw material, (without reckoning tea, 
coffee, and tropical products, which must be brought from abroad,) 
it is evident that we must be constantly pressed to purchase from 
foreign countries more than we can easily pay for by selling to 
them raw material. In order, then, to enlarge the foreign market 
for our cotton, tobacco, and flour, we must offer them on the most 
favorable terms. We must offer them at the American price, say 
of one hundred-weight for six pounds of manufactures, rather than 
at the foreign price, which they would otherwise naturally assume, 
of one hundred-weight for teti pounds. At this foreign price, it 
may be assumed, that we should procure only 200,000 pounds of 
manufactured goods, — not enough to supply our wants. But in 
order to obtain more, we must be able to sell moi'e ; and in order 
to sell more, we must offer the raw material at a lower price, so 
as to enable a greater number of foreigners to purchase it. The 
principle is, then, that whichever nation is under the strongest 
temptation or necessity to buy fi-om others, — whichever needs to 
buy more value than it can readily sell, — tliat nation labors under 
a disadvantage in the traffic, and must offer its own commodities 
at the lowest possible price. 

" At the lowest price which is possible," we say ; for the theory 
shows clearly that there are limits beyond which the price can 
neither be elevated nor depressed. We cannot sell for less than 
six pounds, because the cost of producing a hundred-weight of raw 
material would, with all our disadvantages in manufacturing, 
enable us to manufacture six pounds of such goods for oui-selves. 
Neither can we obtain more than ten pounds, because the labor and 
capital bestowed on eleven pounds of these goods would enable the 
English, in spite of their disadvantages in regard to raw produce, 
to raise one hundred-weight of it for themselves. Within these 
limits, then, is the sphere of operation of a Protective Tariff; be- 
yond them is the sphere of Free Trade. Prohibitory duties are 
always unwise ; for the object is to check consumption, not to 
destroy foreign trade. 

The purpose of a Protective Tariff is to secure to each nation the 
use of its own natural advantages ; or rather, to prevent it from 



486 FREE TRADE OR 

throwing these natural advantages away by too assiduous and ex- 
clusive cultivation of them, the effect of which would be, that the 
other arts and branches of industry would perish by neglect. A 
community cannot prosper by devoting all its energies to the cul- 
tivation of but one of the three great branches of industry. De- 
voted to agriculture alone, or to manufactures alone, or to commerce 
alone, it makes no difference ; — in either case, it will have but 
one class of articles to sell, while it will have two classes of articles 
to purchase ; — in either case, it will have a greater surplus of one 
hind to dispose of, than other nations will be willing or able to 
purchase, except at the lowest possible price ; — and to sell at the 
lowest possible price, as we have now demonstrated, is to sacrifice 
the whole of the natural advantage with which we are endowed by 
Nature, and to put ourselves on a par with other countries in this 
respect, while we are below them in every other respect. 

That the Protective policy here advocated is consistent with the 
doctrines of Political Economy, as that science is usually taught 
in Europe, must appear from the limitations of the theory already 
laid down, and from the fact that this theory is frankly accepted 
even by those English Economists who stoutly maintain the general 
doctrine of Free Trade. For proof, I quote from John Stuart Mill. 

" If it be asked," he says, " what country draws to itself the 
greatest share of the advantages of any trade it carries on, the 
answer is, — the country for whose productions there is in other 
countries the greatest demand, and a demand the most susceptible 
of increase from additional cheapness. In so far as the productions 
of any country possess this property, the country obtains all foreign 
commodities at less cost. It gets its imports cheaper, the greater 
the intensity of the demand in foreign countries for its exports. 
It also gets its imports cheaper, the less the extent and intensity of its 
own demand for them. The marhet is cheapest to those whose demand 
is small. A country which desires few foreign productions, and 
only a limited quantity, while its own commodities are in great 
request in foreign countries, will obtain its limited imports at ex- 
tremely small cost, — that is, in exchange for the produce of a 
very small quantity of its labor and capital." 

Consequently, he argues, "the opening of a new branch of 
export trade ; or an increase in the foreign demand for our pro- 
ducts, either by the natural course of events, or by an abrogation 



THE PROTECTIVE SYSTEM. 487 

of duties ; or a check to our demand for foreign commodities hy the 
laying on of import duties at home, or of export duties elsewhere ; 

— these, and all other events of similar tendency, would make our 
imports no longer a balance for our expoi'ts ; and the countries 
which take our exports would be obliged to offer their commodi- 
ties (specie among the rest) on cheaper terms, in order to re- 
establish the equation of demand ; and thus we should obtain 
money cheaper, and acquire a generally higher rate of prices. 
Incidents the reverse of these would produce effects the reverse, 

— would reduce prices." 

It appears, then, that it is even more for the interest of Amer- 
ican planters and agriculturists, than of the manufacturers 
themselves, that duties should be laid on the importation of 
foreign manufactured goods, so as to restrict the amount of such 
importation. We thus purchase our imports more cheaply, or, 
what is the same thing, as commodities are actually bartei'ed for 
commodities, we sell our exports at a higher price. The effect 
of the duty is, not to raise the price of the imported articles, but 
to cheapen them, the duty actually falling in great part upon the 
foreign manufacturer. 

For instance : What would be the probable effect of raising 
the duty from 10 to 35 per cent upon all the imported articles 
which come in competition with American manufactures ] Sup- 
pose the value of such articles did not exceed 200 millions ; the 
other imports being of such commodities, — tea, coffee, drugs, raw 
materials, and the like, — that we should be obliged, under any 
circumstances, to pm-chase them of foreigners. Even if the heavier 
duty on the competing articles should reduce the amount im- 
ported to 100 millions, the revenue of our own government would 
be much increased by the alteration. But England, from whom 
we import most of the competing goods, would still need to obtain 
from us as much vegetable food, tobacco, and cotton as ever ; and 
her sale of her own manufactures to the United States being 
diminished to the extent of 100 millions, she would be obliged to 
offer to all nations, the United States included, these manufac- 
tures, and other commodities also, at lower prices. Compelled to 
seek an extension of the foreign market for whatever she has 
to sell, she must submit to a reduction of price, in order to bring 
her commodities within the reach of a larger class of consumers. 



488 FKEE TEADE OR 

American consumers, for instance, would not take even half as 
much as before, if the price in this country were enhanced to 
the full extent of the additional duty, — that is, 25 per cent. 
England would have to bear probably 15 per cent of this duty, 
or to reduce her prices in this proportion, leaving the American 
price to be enhanced 10 per cent, which would be encouragement 
enough to set additional manufactories in motion in the United 
States, so as to produce at home the 50 millions' worth cut off 
from our imports. 

Already, then, we see the fallacy of the oft-repeated assertion 
by the advocates of Free Trade, that a protective duty raises the 
price both of the home commodity and of the foreign one which 
continues to be imported, to the full extent of that duty. If the 
impost be not so great as to be virtually prohibitive, — in which 
case we admit it would be impolitic, — the home price cannot be 
increased to the extent of more than one half, seldom more than 
two fifths, of the duty. Everywhere the inequality in the dis- 
tribution of wealth is such, that the class of persons having an 
income, for instance, of $2,500 a year, is not, as we might be 
tempted by a superficial glance at the subject to beheve, only 25 
per cent less numerous than the class having $ 2,000 a year ; but 
is probably not more than half as large. If, then, the price should 
rise to the full extent of the duty, say 25 per cent, the total 
consumption would not be more than half as great, as only those 
would buy who have an income at least one fourth larger than the 
smallest income possessed by any of the former purchasers ; but 
a portion of what is consumed being now of home production, the 
importation of the article would fall off more than 50 per cent. 

This reasoning, it is true, applies only to the somewhat finer 
and more costly articles of manufacture, for which alone a Pro- 
tective duty is needed. In respect to breadstuffs and other 
articles of prime necessity, we have already seen that a very con- 
siderable enhancement of price is needed, in order materially ta 
lessen the consumption. The sale of the cheaper and more com- 
mon products of manufacturing industry, also, may not be much 
checked by an addition of 20 or 30 per cent to their price, as their 
cost forms but a small part of the total expenditiu-e of any class 
of persons. But the principle holds true in the only cases in 
which we need to apply it. 



THE PROTECTIVE SYSTEM. 489 

The situation of the United States is so pecuHar, that argu- 
ments drawn from European experience for the guidance of 
American legislation are apt to be wholly fallacious and unsound. 
We can more profitably go for a lesson to the other side of the 
habitable globe ; I mean, to British India. There we find a 
deficiency of capital, an abundance of fertile territory, a conse- 
quent Surplus of agricultural produce, and a lack of that skill in 
manufacture which can only be gained by long experience under a 
strict Protective policy, such as England has enjoyed for nearly 
two centuries ; — all these chcumstances strongly reminding us 
of corresponding featm-es in our own condition. Now, the 
Governor of India, in a con-espondence with the East India Com- 
pany on the subject of the Dacca weavers, made this statement : 
"Some years ago, the East India Company annually received 
of the produce of the looms of India to the amount of six to 
eight million pieces of cotton goods. The demand gradually fell, 
and has now ceased altogether. European skill and machinery 
have superseded the produce of India. Cotton piece-goods, for 
ages the staple manufacture of India, seem forever lost ; and the 
present suffering to numerous classes in India is scarcely to he par- 
alleled in the history of commeyxe." 

This example throws light upon another reason, already urged 
in another place, for the establishment of a Protective policy in 
America, as well as in India ; — I mean, the great difference in 
the cost of transportation between raw materials and manufac- 
tured goods, which operates greatly to the advantage of the 
country producing the latter, because manufactures have much 
the greater value in the smaller weight and bulk. Rice, wheat, 
cotton, and sugar are among what might be called the greatest 
natural exports of India, as they are produced there very cheaply 
in great abundance. The average price of wheat at Calcutta is 
less than fifty cents a bushel ; but the freight and other charges 
of transporting that bushel to England, and selling it there, 
amount to about eighty cents. England, therefore, though she 
has abolished her com laws, enjoys a virtual Protective duty 
against wheat from India, amounting to 160 per cent. The cost 
of transporting English manufactured goods to India cannot, on 
an average, exceed 40 per cent of their value. The difference 
between these two rates, amounting to 120 per cent, is, of course. 



490 FREE TRADE OR 

really prohibitive in its effects ; and India wheat is not brought 
to England at all. 

The diflFerence in the cost of transporting raw materials and 
manufactured goods across the Atlantic is certainly not so great 
as in sending them round the Cape of Good Hope ; but it is 
enough to give a very important advantage to the traffic to 
England. Our chief article of export, raw cotton, is a very 
bulky one ; and even breadstuffs and tobacco are more expensive, 
both for land and sea carriage, than the cheapest manufactures 
of the loom. On the very principles of Free Trade, which means 
nothing but trade with equal advantages to the two parties, we 
ought to levy a considerable Protective duty, in order to make up 
the difference in the cost of transportation. 

I have already alluded to the fact, that a Protective duty, 
being designed as a check to injurious fiuctuations of price, is 
graduated with reference to the lowest price at which the foreign 
commodity is ever sold, and not with reference to the average 
price. Thus, a duty of thirty, may not raise the average price 
more than fifteen, per cent ; and this last may be the whole 
amount of real protection that the American manufacturer needs. 
But to secure this protection at all times, the duty must be fixed 
at thirty per cent, because circumstances may sometimes force 
the foreign commodity upon the market at a price fifteen per 
cent below its ordinary value. Thus, a temporary excess of pro- 
duction, or the reaction after a commercial crisis, may flood the 
English market, for a while, with manufactured goods. These must 
be got rid of, even at a great sacrifice ; and their owners prefer to 
send them abroad to be sold, rather than to lower prices by forced 
sales in the home market. Hence, foreigners can often purchase 
British manufactures at a less price than the English themselves. 
The injurious effect of a forced sale is thereby only transferred 
from the English to the American market. Prices here may be 
depressed to a ruinous extent for a time, only to recover their 
former level, or even to rise above it, after the mischief has been 
done of driving American manufactures out of the business. 
The proper object of legislation, in regard to the admission of 
imports, is to prevent injurious fluctuations of prices. 

The disturbing effect produced by a temporary glut of the 
imported commodity may be much larger than its cause would 



THE PROTECTIVE SYSTEM. 491 

seem to warrant ; for the quantity thus thrown upon the market 
need not be large. But, as we have seen, taking away a third 
part of the supply may either double the price, or fail to raise 
it even one sixth, according as the article is one of prime neces- 
sity, or one which people can easily do without. In like manner, 
making the stock of goods on hand one third larger than usual 
may sink the price, not merely in proportion to that increase, but 
to one half of its former amount. Then the whole stock, both 
foreign and domestic, must be sold at this ruinous sacrifice. 

" To give the monopoly of the home market," says Adam Smith, 
"to the produce of domestic industry, in any particular art or 
manufacture, is in some measure to direct private people in what 
manner they ought to employ their capitals, and must, in almost 
all cases, be either a useless or a hurtful regulation. If the pro- 
duce of domestic can be bought there as cheaply as that of foreign 
industry, the regulation is evidently useless. If it cannot, it must 
generally be hiu'tful. It is the maxim of every prudent master 
of a family, never to attempt to make at home what it will cost 
him more to make than to buy. The tailor does not attempt to 
make his own shoes, but buys them of the shoemaker. Tlie shoe- 
maker does not attempt to make his own clothes, but employs a 
tailor. What is prudence in the conduct of every private family, 
can scarce be folly in that of a gi-eat kingdom." 

The comparison of individuals with communities is often a faulty 
and deceptive one, and is particularly so in this case. Certainly 
it would be unwise in an individual to be his own weaver, tailor, 
carpenter, and blacksmith ; he would thus lose all the advantages 
of a Division of Labor, and would not become skilled in any depart- 
ment. But this objection does not hold in the case of a com- 
munity, which has only a fictitious unity, and is really made up 
of many individuals, who may distribute among themselves all the 
employments which are requisite for the production of all the com- 
modities that the society needs. No one person is thus required 
to practise more than one art, and the Division of Labor among 
these individuals is as perfect as if the same number of trades 
were partitioned out among so many distinct communities. Still 
more, as communities are often separated from each other by 
broad tracts of sea or land, should each one confine its industry to 
the production of a single commodity, and purchase whatever else 



492 FREE TRADE OR 

it needs from rival states, all its articles of consumption, one alone 
excepted, would come to it burdened with a heavy cost of trans- 
portation ; and the sale of its own single product everywhere but 
at home would be impeded by an addition to its cost from the 
same cause. All the advantages of a Division of Labor result from 
a separation of employments among individuals, and become dis- 
advantages in the case of distinct states, counties, and even towns. 
To one who is a blacksmith, it is no help, but rather a hindrance, 
that his next-door neighbor is a blacksmith also ; he has thus a 
competitor in satisfying the wants of his own village, where every 
mechanic finds his best and most profitable customers; and as 
blacksmiths' work is heavy, he cannot carry his wares for sale 
even to the next county or town without lessening his profits. 

The inhabitants of every country town understand their own 
interests much better than Adam Smith did. Instead of forming 
themselves into a settlement composed exclusively of artisans of 
one trade, each community has its own mason, shoemaker, car- 
penter, shopkeeper, lawyer, doctor, and clergyman, and is thus not 
obliged to send a dozen or twenty miles in order to have a horse 
shod, a chimney built, a tooth pulled, or a marriage celebrated. 
A Yankee farmer, with half a dozen stout sons, acts upon the same 
principle, in not educating them all to his own employment, but 
making a mechanic of one, a merchant of another, a sailor of a 
third, sending a fourth to college, and keeping only one at home 
to be his own successor upon the farm. As all occupations are 
precarious, he knows that, by this course, he multiplies the chances 
of success, or reduces the chances of failure, for the whole family, 
besides suiting each member of it with an employment best adapted 
to his peculiar powers and inclination. 

We may ask if it be not as reasonable for a nation, as it con- 
fessedly is for an individual, to enter upon a course of education, 
or serve an apprenticeship. During the period of discipline, the 
gains will be small, the labor severe, and perhaps the expenses 
heavy ; but an art or handicraft may thus be acquired which may 
afterwards be exercised with great profit. We suppose that the art 
is one for which the individual or the nation is sufficiently qualified 
by nature, so that merely the tact and dexterity, which can only be 
acquired by practice, are wanting. The common answer to this 
question, " that when the proper time haa arrived, and sufficient 



THE PEOTECTIVE SYSTEM. 493 

capital has been accumulated, manufactures will introduce them- 
selves without the aid of Protective duties," is evasive and insuffi- 
cient. It supposes that want of capital is the only obstacle to the 
immediate commencement of manufacturing enterprise ; whereas 
skill is also requisite. Capital, we admit, may be accumulated in 
agi'iculture and other pursuits ; but skill can be acquired only by 
actual experiments in manufacture, and those experiments can be 
tried only at considerable sacrifice. Individuals cannot be ex- 
pected to make these sacrifices, when the results of the experiment, 
if successful, will not accrue to their exclusive advantage, but will 
be open to all. 

Even in Great Britain, these principles are carried into practical 
application, through the encouragement afibrded to authors and 
inventors, by securing to them, for a limited period, the exclusive 
right to sell their respective writings and discoveries. Patents 
and copyrights, which no one thinks it improper to grant, are sig- 
nal instances of the successful application of the principles of the 
Protective system. They are strict monopolies, no one but the 
author or inventor, and his agents, being allowed to manufacture 
or sell the particular book or machine which is thus protected. 
Consequently, they are prohibitive rather than protective duties ; 
any price can be set upon the articles which the owner of the 
patent or copyright sees fit to demand. And the public cheerfully 
pay the addition thus made to the natural cost of the commodity, 
knowing that, without such encouragement, few good books would 
be written and few useful machines invented ; and that, at the ex- 
piration of a limited time, the right to make and vend the work 
will become general, and the community will then be the richer by 
the whole value of the original proprietor's genius and labor. 

The reasonableness of granting patent rights and copyrights is 
frankly admitted by an able advocate of Free Trade, Mr. J. S. Mill. 
This, he says, is not making the commodity dear for the benefit 
of the patentee, but merely postponing a part of the increased 
cheapness which the public owe to the inventor, in order to com- 
pensate and reward him for the service. Having conceded thus 
much, he finds himself obliged, by consistency of reasoning, to 
make the following additional admission, which really covers the 
whole ground usually claimed by the advocates of a Protective 
system in the United States. "The only case," he says, "in 



494 FEEE TEADE OR 

which, on mere principles of Political Economy, protecting duties 
can be defensible, is when they are imposed temporarily, (es- 
pecially in a young and rising nation,) in hopes of naturalizing a 
foreign industry in itself perfectly suitable to the circumstances 
of the country. The superiority of one country over another in 
a branch of production often arises only from having begun it 
sooner. There may be no inherent advantage on one part, or 
disadvantage on the other, but only a present superiority of ac- 
quired skill and experience. A country which has this skill and 
experience yet to acquire, may in other respects be better adapted 
to the production than those which were earlier in the field ; and 
besides, it is a just remark, that nothing has a greater tendency 
to promote improvements in any branch of production, than its 
trial under a new set of conditions. But it cannot be expected 
that individuals should, at their own risk, or rather to their 
certain loss, introduce a new manufacture, and bear the burden 
of carrying it on, until the producers have been educated up to 
the level of those with whom the processes are traditional. A 
protecting duty, continued for a reasonable time, will sometimes 
be the least inconvenient mode in which the nation can tax itself 
for the support of such an experiment." 

But on this great question between Free Trade and a Protective 
policy, these arguments relating only to pecuniaiy loss or gain 
are not so weighty as the considerations, previously adduced, re- 
specting the devotion of the greater part of the people to skilled 
or rude labor, and their consequent collection in towns and cities, 
or wide dispersion over the face of the country. Viewed in this 
light, I confess, the question seems to be one between progress in 
civilization and the arts, or a gradual return, I will not say to 
barbarism, but to that very imperfect stage of civilization which 
exists in all countries where the population are almost exclusively 
devoted to agriculture. The best legislative policy is that which 
will most effectually develop all the natural advantages of a coun- 
try, whether mental or material. It is as wasteful, to say the 
least, to allow mechanical skill and inventive genius to remain 
unenaployed, as it would be to permit water-power to run without 
turning mills, or mineral wealth to continue in the ore, or forests 
to wave where cotton and grain might grow luxuriantly. If the 
rude labor of husbandry is to form the principal employment of 



THE PROTECTIVE SYSTEM. 495 

the people, the higher remuneration of skilled labor in the arts 
must be sacrificed ; and this would be as bad economy as to turn 
our richest soils into sheep-pastures, or to feed cattle upon the 
finest wheat. The dispersion of the inhabitants over vast tracts 
of ten-itory, in the isolated pursuits of agriculture, the great ma- 
jority of them being doomed to work which would not tax the 
mental resources of a Feejee-Islander, must be fatal, not only to 
the growth of wealth, but to many of the higher interests of 
humanity. The hardships and privations of a life in the back- 
woods are a fearful drawback upon that bounty which confers, as 
a free gift, a homestead farm with a soil that reproduces the seed 
a hundred-fold. To give full scope to all the varieties of taste, 
genius, and temperament ; to foster inventive talent ; to afford 
adequate encouragement to all the arts, whether mechanical or 
those which are usually distinguished as the fine arts; to con- 
centrate the people, or to bring as large a portion of them as 
possible within the sphere of the humanizing influences, and larger 
means of mental cultm-e and social improvement, which can be 
foimd only in cities and large towns, — these are objects which 
deserve at least as much attention, as the inquiry where we can 
purchase calicoes cheapest, or how great pecuniary sacrifice must 
be made before we can manufacture railroad iron for ourselves. I 
see not how these ends can be obtained in a country like ours, 
which is, so to speak, cursed with great advantages for agriculture, 
emigration, and the segregation of the people from each other, 
without throwing over our manufactui'ing industry, at least for 
half a century longer, the broad shield of an efiective Protecting 
Tariff. When we have enjoyed, as England has already enjoyed, 
the benefit of a strict Protective policy for over a century, for the 
purpose of completing our education in manufactures, then we 
shall be ready to do what England at last has done, — to throw 
down all barriers, and to invite the world to compete with us 
in the application of industry and skill to any enterprise designed 
to satisfy the wants of man. 

THE END. 



BIVERSIDE, CAMBRIDOk: 
PRINTED BY H. O. HOUGHTON AND COMPAWT. 



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